The Risk of War: An Analysis Combining Real Options and Games

Laurent Gauthier ()
Additional contact information
Laurent Gauthier: LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis, CAC-IXXI, Complex Systems Institute

Working Papers from HAL

Abstract: Real options have been used to evaluate investment decisions with various structures, but have rarely been put into a game theoretical context. We examine the risk of war over a common resource, whose value is a geometric Brownian Motion, where one country may preemptively appropriate the resource, and the other wage war for it. We derive a closed form expression for the optimal mixed strategy that both countries should follow, and show that the resulting price level that triggers capturing the resource and subsequent war asymptotically follows a power law. The present value of the time until that trigger also decays slowly asymptotically. In consequence, in spite of both countries' propensity towards preemption, war may be indefinitely delayed.

Keywords: Real options; resource wars; games; mixed strategies (search for similar items in EconPapers)
Date: 2023-11-15
Note: View the original document on HAL open archive server: https://univ-paris8.hal.science/hal-04388643v1
References: Add references at CitEc
Citations:

Downloads: (external link)
https://univ-paris8.hal.science/hal-04388643v1/document (application/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:hal:wpaper:hal-04388643

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().