Bandwagon investment equilibrium of a preemption game

Kihyung Kim and Abhijit Deshmukh

No 2018-39, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: In stochastic and competitive environments, investors face an investment dilemma because the environments provide conflicting incentives. Empirical research reports various behaviors exhibited by investors, including voluntary concurrent investments, which are called bandwagon investments. However, the current theoretical understanding is still limited in explaining under which condition the investment bandwagon effect occurs. The authors investigated the closed-loop subgame perfect equilibrium of an investment timing game that describes voluntary simultaneous investments. They showed that investors are on the investment bandwagon when the second mover's additional profit rate exceeds a threshold value. Otherwise, investors sequentially invest. It explains the frequently observed investment herd effect. Moreover, it shows that the investment bandwagon effect does not exist for entering firms.

Keywords: option exercise games; preemption games; bandwagon investment; closed-loop equilibrium (search for similar items in EconPapers)
JEL-codes: C73 D43 D92 L13 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-gth
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201839

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