Investment under uncertainty, competition and regulation
Adrien Nguyen Huu - IMPA, Estrada Dona Castorina, 110, Rio De Janeiro, 22460-320, Brazil (email)
Abstract: We investigate a randomization procedure undertaken in real option games which can serve as a basic model of regulation in a duopoly model of preemptive investment. We recall the rigorous framework of M. Grasselli, V. Leclère and M. Ludkovsky (Priority Option: the value of being a leader, International Journal of Theoretical and Applied Finance, 16, 2013), and extend it to a random regulator. This model generalizes and unifies the different competitive frameworks proposed in the literature, and creates a new one similar to a Stackelberg leadership. We fully characterize strategic interactions in the several situations following from the parametrization of the regulator. Finally, we study the effect of the coordination game and uncertainty of outcome when agents are risk-averse, providing new intuitions for the standard case.
Keywords: Real option game, preemption game, investment, regulation, Stackelberg competition, Cournot competition.
Received: September 2013; Revised: February 2014; Available Online: November 2014.