The effects of information on strategic investment and welfare |
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Authors: | Jacco J J Thijssen Kuno J M Huisman Peter M Kort |
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Institution: | (1) Department of Economics, Trinity College Dublin, Dublin 2, IRELAND;(2) Department of Econometrics & Operations Research and CentER, Tilburg University, PO Box 90153, 5000 LE Tilburg, THE NETHERLANDS;(3) Centre for Quantitative Methods, P.O. Box 414, 5600 AK Eindhoven, THE NETHERLANDS;(4) Department of Economics, UFSIA, University of Antwerp, Prinsstraat 13, 2000 Antwerp 1, BELGIUM |
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Abstract: | Summary. The paper analyses the influence of uncertainty and competition on the strategic considerations of a firm’s investment decision, where the firm receives imperfect signals about the profitability of an investment project. We find a preemptive or an attrition equilibrium depending on a trade-off between first and second mover advantages. We show that welfare can be negatively affected by decreasing uncertainty, i.e. more and/or better information. Furthermore, simulations indicate that duopoly leads to higher welfare than monopoly if there are few and relatively non-informative signals, whereas the opposite holds if there are many and relatively informative signals.Received: 13 May 2004, Revised: 22 March 2005, JEL Classification Numbers:
C61, D43, D81.Jacco J. J. Thijssen: Correspondence toDolf Talman is acknowledged for many inspiring discussions and meticulous proof-reading. Jan Boone, Thomas Sparla, participants in the workshop on “Recent Topics in Real Options Valuation”, July 2002, Krems, Austria, and an anonymous referee are thanked for helpful comments. The usual disclaimer applies. |
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Keywords: | Uncertainty Strategic investment Imperfect information Welfare |
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