Can greater uncertainty hasten investment?

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 in a duopoly, greater uncertainty can actually hasten rather than delay investment, contrary to the usual outcome, due its effect on the equilibrium of the timing game between the players. In the presence of positive externalities, greater uncertainty can raise the leader's value more than the follower's; pre-emption then entails that the leader must act sooner. A switch in the pattern of equilibrium investment as uncertainty increases is also possible, which may hasten investment. These findings reinforce the importance of extending real options analysis to include strategic interactions and externalities between players.

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