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Can greater uncertainty hasten investment?

Can greater uncertainty hasten investment?
Can greater uncertainty hasten investment?
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.
University of Southampton
Mason, Robin
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Weeds, Helen
0f3a0771-efdd-4df5-8f38-aa8e60fc7cd2
Mason, Robin
c989f0e0-de54-495d-aeaf-75b42d62cb61
Weeds, Helen
0f3a0771-efdd-4df5-8f38-aa8e60fc7cd2

Mason, Robin and Weeds, Helen (2003) Can greater uncertainty hasten investment? University of Southampton

Record type: Monograph (Project Report)

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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Published date: 2003

Identifiers

Local EPrints ID: 33429
URI: https://eprints.soton.ac.uk/id/eprint/33429
PURE UUID: 335cb6e1-b1d9-4127-b5b2-dc62805cebdd

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Date deposited: 18 May 2006
Last modified: 17 Jul 2017 15:52

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