Investment Dynamics: Good News Principle

Talat Genc and Georges Zaccour

No 1006, Working Papers from University of Guelph, Department of Economics and Finance

Abstract: We study a dynamic Cournot game with capacity accumulation under demand uncertainty, in which the investment is perfectly divisible, irreversible, and productive with a lag. We characterize equilibrium investments under closed-loop and S-adapted open-loop information structures. Contrary to what is established usually in the dynamic games literature with deterministic demand, we find that the firms may invest at a higher level in the open-loop equilibrium (which in some cases coincides with Markov perfect equilibrium) than in the closed-loop Nash equilibrium. The rankings of the investment levels obtained in the two equilibria actually depend on the initial capacities and on the degree of asymmetry between the firms. We also observe, contrary to the bad news principle of investment, that firms may invest more as demand volatility increases and they invest as if high demand (i.e., good news) will unfold in the future.

Keywords: Capacity Investment; Dynamic Games; S-adapted Open-Loop Equilibrium; Closed-loop Equilibrium. (search for similar items in EconPapers)
JEL-codes: C73 L13 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.uoguelph.ca/economics/sites/uoguelph.ca.economics/files/Genc2.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.uoguelph.ca/economics/sites/uoguelph.ca.economics/files/Genc2.pdf [301 Moved Permanently]--> https://www.uoguelph.ca/economics/sites/uoguelph.ca.economics/files/Genc2.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gue:guelph:2010-6.

Access Statistics for this paper

More papers in Working Papers from University of Guelph, Department of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Stephen Kosempel (kosempel@uoguelph.ca).