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Investment, uncertainty and pre-emption

Mason, Robin and Weeds, Helen (2010) 'Investment, uncertainty and pre-emption.' International Journal of Industrial Organization, 28 (3). pp. 278-287. ISSN 0167-7187

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Abstract

This paper examines irreversible investment in a project with uncertain returns, when there is an advantage to being the first to invest and externalities to investing when others also do so. We show that the possibility of pre-emption can have significant qualitative and quantitative effects on the relationship between uncertainty and investment. In a single-agent real options model, the trigger threshold for investment increases without bound as uncertainty grows. In contrast, the investment trigger of a leader faced with pre-emption is bounded above as uncertainty increases. In fact, we show that under certain parameter values, greater uncertainty can lead the leader to invest earlier. These findings reinforce the importance of extending real options analysis to include strategic interactions between players. Applications to industry situations are also discussed.

Item Type: Article
Uncontrolled Keywords: Real options; Investment valuation; Uncertainty; Pre-emption
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 17 Jul 2012 23:49
Last Modified: 26 Feb 2016 10:06
URI: http://repository.essex.ac.uk/id/eprint/3064

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