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Real Options and Game Theoretical Approaches to Real Estate Development Projects: Multiple Equilibria and the Implications of Different Tie-Breaking Rules

Tommaso Gabrieli () and Gianluca Marcato ()

Real Estate & Planning Working Papers from Henley Business School, University of Reading

Abstract: This paper builds on a fast growing literature which introduces game theory in the analysis of real option investments in a competitive setting. Specifically, in this paper we focus on the issue of multiple equilibria and on the implications that different equilibrium selections may have for the pricing of real options and for subsequent strategic decisions. We present some theoretical results of the necessary conditions to have multiple equilibria and we show under which conditions different tie-breaking rules result in different economic decisions. We then present a numerical exercise using the information set obtained on a real estate development in South London. We find that risk aversion reduces option value and this reduction decreases marginally as negative externalities decrease.

Keywords: game theory and real options; equilibrium selection; real estate development (search for similar items in EconPapers)
JEL-codes: C73 D11 D81 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009
New Economics Papers: this item is included in nep-gth, nep-ppm and nep-ure
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http://www.henley.reading.ac.uk/rep/fulltxt/0509.pdf (application/pdf)

Related works:
Working Paper: REAL OPTIONS AND GAME THEORETICAL APPROACHES TO REAL ESTATE DEVELOPMENT PROJECTS: MULTIPLE EQUILIBRIA AND THE IMPLICATIONS OF DIFFERENT TIE-BREAKING RULES (2010) Downloads
Working Paper: Real Options and Game Theoretical Approaches to Real Estate Development Projects: Multiple Equilibria and the Implications of Different Tie-Breaking Rules Downloads
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