comment on cole the view that small rms face greater problems in obtaining credit thanlarge rms has a long history going back at least as far as the loan relationshipmodels of hodgeman 1961 and wood 1975 and the credit rationing work ofja ee and modigliani 1969 nevertheless there are few studies that provideor analyze direct evidence that credit is rationed with nonprice terms to rms at the macro level most empirical studies of business credit availability use in direct proxies ranging from early studies such as ja ee and modigliani 1969 who gauged availability by the share of small sized loans among all bank loans to more modern models that point to a role of cash ow as a determinant ofinvestment at the micro level empirical studies have indirectly tested forthe existence of credit rationing by assessing the behavior of loan pricing e g berger and udell 1992 1995 testing whether liquidity or cash owhas a greater impact on investment by smaller rms relative to larger rms e g fazzari et al 1988 or investigating whether smaller rms more heavilyuse expensive trade credit during periods of tight credit e g ja ee 1971 pe tersen and rajan 1994 cole 1998 lls a void in the literature on credit availability by testing how rm characteristics a ect a small rm s likelihood of experiencing a loan denialusing a unique cross section data set that provides direct evidence of nonpricecredit rationing this paper nds that preexisting nancial service relationshipswith a lender have a positive e ect on the probability of loan approvals con sistent with prior studies arguing that banks gain information about credit riskfrom monitoring borrower deposit activity e g black 1975 fama 1985 nakamura 1993 in addition results indicate that much of the e ect of

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

overinvestment and macroeconomic uncertainty evidence from renewable and non renewable resource firms abstract investment is an inherent component of business activities however what if firms invest more than they should this study examines this phenomenon which is dubbed as overinvestment among resource firms as induced by the business cycle and macroeconomic uncertainties the analysis is conducted using unbalanced panel data drawn from 584 resource companies across 32 countries covering 1986 to 2017 in four resource sectors 1 alternative energy 2 forestry and paper 3 mining and 4 oil and gas producers the results indicate that the forestry and paper sector overinvests relative to the standard investment level predicted by the investment function regardless of the sample period while the alternative energy sector tends to underinvest also many emerging economies including brazil china india indonesia russia and south korea are found to have overinvested over the last three decades or so in addition the results suggest that commodity price inflation plays a more important role in inducing firms overinvestment than commodity price uncertainty it is also found that the home country s business cycle significantly affects overinvestment with the sign alternating from negative to positive after the global financial crisis furthermore the finding also shows no significant relationship between global geopolitical risk and overinvestment but a significantly positive relationship is found between global economic and country level governance policy uncertainties and overinvestment lastly the results suggest that the effect of overinvestment on firm performance after three years is positive especially for firms in the mining sector

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

optimal pricing and quality choice when investment in quality is irreversible this paper examines the price and quality choice of a single product risk neutral monopolist who can delay irreversible investments required for market entry it is shown that the price and quality she chooses at entry increase with uncertainty about the size of future demand in a stackelberg leader follower game the leader and follower pre commit immediately up to a certain level of uncertainty in this case the leader produces the higher quality good when uncertainty is higher than this threshold the follower will wait and enter the market later with a higher quality good

when and how much to invest investment and capacity choice under product life cycle uncertainty abstract while empirical research indicates that innovations typically follow a product life cycle that is subject to uncertainty in many industries endless cash flow growth is still at the heart of most papers guiding investment decisions under uncertainty this paper studies the effect of an uncertain technological life cycle on the decision to invest in new product introduction taking into account the combined effects of flexible investment timing and optimal capacity choice based on a numerical example referring to investment decisions in facilities for the production of electric vehicle batteries we find that the optimal investment threshold follows an s curve over the product life cycle and derive the optimal capacity choice for the given investment decision

leaders followers and equity risk premiums in booms and busts abstract we study an investment problem in which two asymmetric firms face competition and the regime characterizing the economic condition follows a markov switching process we derive the value functions and investment thresholds of the leader and follower the option value of regime uncertainty is found to be quite important for the investment decision of firms we also show the relationship between the equity risk premium and the economic cycle that has not been done in previous studies which proxy economic conditions by the level of demand or other state variables

strategic investment under uncertainty a synthesis abstract investment is a central theme in economics finance and operational research traditionally the focus of analysis has been either on assessing the value of flexibility investment under uncertainty or on describing commitment effects in competitive settings industrial organization research contributions addressing the intersection of investment under uncertainty and industrial organization have become numerous in recent years in this paper we provide an overview aimed at categorizing and relating these research streams we highlight managerial insights concerning the nature of competitive advantage first versus second mover advantage the manner in which information is revealed firm heterogeneity capital increment size and the number of competing firms

the interaction of debt financing cash grants and the optimal investment policy under uncertainty abstract significant progress has been made toward understanding a levered firm s optimal investment policy under uncertainty to date however not much work has concentrated on the time scale trade off and collectively held real options we employ a game theoretic real option model between a firm and a government to analyze the effect of uncertainty and investment stimulus in the form of cash grants on optimal investment timing financing and investment scaling we find that the jointly held real option between the firm and the government leads to underinvestment regardless of whether the firm has the possibility to issue debt subsidies however reduce the level of underinvestment notably the results indicate that even though levered firms receive less support they invest more than unlevered firms this challenges recent findings that a firm s optimal investment level is not affected by the way it finances a project similarly we find that for realistic parameter constellations the levered firm s optimal investment threshold can be higher than that of its unlevered counterpart this indicates that the availability of tax shield benefits does not necessarily serve as an incentive to invest earlier finally we show that the effect of cash flow uncertainty on the equilibrium level of grants is ambiguous and triggers the switch from a subsidy to non subsidy regime

an equilibrium model of investment under uncertainty this paper analyzes the optimal investment decisions of heterogeneous rms in a competitive uncertain environment we characterize rms optimal investment strategy explicitly and derive a closed form solution for rm value we show that in the strategic equilibrium real option premia are signi cant as a result rms delay investment choosing optimally not to undertake some positive npv projects the model predicts that rm returns vary over the business cycle with returns negatively skewed during expansions but positively skewed in recessions

information revelation through option exercise in many real world situations agents must formulate option exercise strategies with imperfect information in such a setting agents may infer the private signals of other agents through their observed exercise strategies the building of an office building the drilling of an exploratory oil well and the commitment of a pharmaceutical company toward the research of a new drug all convey private information to other market participants this article develops an equilibrium framework for option exercise games with asymmetric private information many interesting aspects of the patterns of equilibrium exercise are analyzed in particular informational cascades where agents ignore their private information and jump on the exercise bandwagon may arise endogenously article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

capacity switching options under rivalry and uncertainty abstract deregulated infrastructure industries exhibit stiff competition for market share firms may be able to limit the effects of competition by launching new projects in stages using a two stage real options model we explore the value of such flexibility we first demonstrate that the value of investing in a sequential manner for a monopolist is positive but decreases with uncertainty next we find that a typical duopoly firm s value relative to a monopolist s decreases with uncertainty as long as the loss in market share is high intriguingly this result is reversed for a low loss in market share we finally show that this loss in value is reduced if a firm invests in a sequential manner and specify the conditions under which sequential capacity expansion is more valuable for a duopolist firm than for a monopolist

strategic growth options we provide a strategic rationale for growth options under uncertainty and imperfect competition in a market with strategic competition investment confers a greater capability to take advantage of future growth opportunities this strategic advantage leads to the capture of a greater share of the market either by dissuading entry or by inducing competitors to make room for the stronger competitor as a result of this strategic effect payoffs are in a rough sense more convex than in the case of no investment in a growth option when the strategic advantage is strong increased uncertainty encourages investment in growth options higher uncertainty means more opportunity rather than simply larger risk if the strategic effect is weak the reverse is true on the other hand an increase in systematic risk discourages the acquisition of growth options our results contradict the view that volatility is a strong disincentive for investment

a real options model to evaluate the effect of environmental policies on the oil sands rate of expansion abstract canadian oil sands hold the third largest recognized oil deposit in the world while the rapidly expanding oil sands industry in western canada has driven economic growth the extraction of the oil comes at a significant environmental cost it is believed that the government policies have failed to keep up with the rapid oil sands expansion creating serious challenges in managing the environmental impacts this paper presents a practical yet financially sound real options model to evaluate the rate of oil sands expansion under different environmental cost scenarios resulting from governmental policies while accounting for oil price uncertainty and managerial flexibilities our model considers a multi plant multi agent setting in which labor costs increase for all agents and impact their optimal strategies as new plants come online our results show that a stricter environmental cost scenario delays investment but leads to a higher rate of expansion once investment begins once constructed a plant is highly unlikely to shut down our model can be used by government policy makers to gauge the impact of policy strategies on the oil sands expansion rate and by oil companies to evaluate expansion strategies based on assumptions regarding market and taxation costs

applications of option pricing theory twenty five years later nobel lecture to the memory of alfred nobel december 9 1997 this abstract was borrowed from another version of this item

profit and expenditure functions in basic public finance an expository note this paper demonstrates how profit and expenditure functions may be used to prove fundamental results about deadweight losses suffered by consumers producers and resource owners losses arising from excise taxes and subsidies are examined and in the case of a tax the individual level analysis is extended to the market level in a partial equilibrium setting in addition profit and expenditure functions are applied to quantity constraints two part tariffs all or nothing choices and reservation prices although no new results are derived the paper provides motivation for the study of indirect objective functions and duality

exact consumer s surplus and deadweight loss consumer s surplus is a widely used tool in applied welfare economics both economic theorists and cost benefit analysis often use consumer s surplus despite its somewhat dubious reputation the basic idea is to evaluate the value to a consumer or his willingness to pay for a change in price of a good from say pricep to pricep because price changes affect consumer welfare an evaluation of this effect is often a key input to public policy decisions yet consumer s surplus is probably the most controversial of widely used economic concepts both paul samuelson and ian little conclude that the economics profession would be better off without it it is my feeling of the situation that substantial agreement exists on the correct quantities to be measured the amount the consumer would pay or would need to be paid to be just as well off after the price change as he was before the price change the quantities correspond to john hicks compensating variation measures an alternative measure which takes ex post price change utility as the basis of comparison is hicks equivalent variation the controversy arises in the measurement of these quantities the usual measurement procedure is to use the area to the left of the marshallian market demand curve between two price levels jules dupuit originated this measure of welfare change and alfred marshall and hicks derived appropriate conditions for its use the primary condition for the area to the left of the demand curve to correspond to the compensating variation is to have constant marginal utility of income marshall gave this condition and if it holds the same quantity will be derived as the area to the left of the compensated hicksian demand curve this area to the left of the compensated demand curve is exactly what the compensating variation and equivalent variation measure thus the constant marginal utility of income is a sufficient condition for marshallian consumer s surplus to be equal to hicks consumer s surplus in this case arnold harberger s plea to use the welfare triangle as one half times the product of the price change times the quantity change to measure deadweight loss corresponds to the correct theoretical amount of welfare change in a recent paper robert willig derives bounds for the percentage difference between the correct measure of either the compensating or equivalent variation and the marshallian measure derived form the market demand curve his bounds which depend on the income elasticity of demand for the single good in the region of price change being considered as well as the proportion of the consumer s income spent on the good demonstrate that the marshallian consumer s surplus is often a good approximation to hicks consumer s surplus the fact that the proportion of the consumer s income spent matters as well as the income elasticity was first pointed out by harold hotelling willig contends that the approximation error will be less than the errors involved in estimating the demand curve thus he hopes to remove the need for apology that applied economists often need to give to theorists who remark on the inappropriateness of using marshallian consumer s surplus to measure welfare change however in this paper i show that for the case primarily considered by willig of a single price change which is also the situation in which consumer s surplus is often used in applied work no approximation is necessary professor of economics massachusetts institute of technology and research associate national bureau of economic research i would like to thank peter diamond erwin diewert daniel mcfadden robert merton robert solow hal varian joel yellin and the referees for help and comments research support from the national science foundation is acknowledged the reason that we still have two rather than one of samuelson s six measures of consumer s surplus arises from an index number problem of the correct basis for the welfare comparison i will give both measures but plan to concentrate on the compensating variation

timing and eco nomic efficiency of climate friendly investments in supply chains abstract emission trading schemes such as the european union emissions trading system euets attempt to reconcile economic efficiency with ecological efficiency by creating financial incentives for companies to invest in climate friendly innovations using real options methodology we demonstrate that under uncertainty economic and ecological efficiency continue to be mutually exclusive this problem is even worse if a climate friendly project depends on investing in of a whole supply chain we model a sequential bargaining game in a supply chain where the parties negotiate over implementation of a carbon dioxide co2 saving investment project we show that the outcome of their bargaining is not economically efficient and even less ecologically efficient furthermore we show that a supply chain becomes less economically efficient and less ecologically efficient with every additional chain link finally we make recommendations for how managers or politicians can improve the situation and thereby increase economic as well as ecological efficiency and thus also the eco efficiency of supply chains

a real options game of alliance timing decisions in biopharmaceutical research and development abstract in this article we examine the alliance timing trade off facing both pharmaceutical and biotech firms in a stochastic and competitive environment specifically we introduce a real options game rog where a pharmaceutical company can choose between two competing biotech firms by sequentially offering a licensing deal early or late in the new drug development process we find that when the alliance raises the drug market value significantly the agreement is signed late in the drug development process this suggests that the postponement effect implied by the use of real options prevails over the biotech firms competition effect which would instead play in favor of an early agreement for pre emption reasons when the alliance does not raise the drug market value significantly the optimal timing depends on the level of royalties retained by the pharmaceutical company in particular an early agreement is signed in the presence of a low level of royalties in this case indeed the competition effect becomes predominant because the pharmaceutical company can substantially reduce the upfront payment and thus the potential loss incurred if the biotech partner does not exercise her option to continue the new drug development process we also show that the alliance timing outcomes of our real options game considerably differ from those obtained when both parties use the net present value npv to assess their payoffs

the impact of lead time on capital investments abstract we study equilibrium investment strategies of firms competing in stochastic dynamic market settings and facing two types of investment structures investment with significant lead time or time to build and investment without or minor lead time we investigate how investment behavior changes when investment is subject to time to build versus when it is not we characterize equilibrium investment strategies under several information structures and compare results to the social optimum we offer some new results the model predicts that controlling for demand and production and investment costs investments and outputs can be higher in progressive industries which often exhibit time to build than in fast paced industries where time to build is insignificant furthermore for both investment types investment with or without time to build we offer a novel equilibrium in which firms incrementally invest this behavior is driven by demand uncertainty and capacity constraints also expected outputs are lower than cournot outputs as firms face uncertainty moreover the amount of uncertainty has different effects over investment types

a theory of exit in duopoly we develop a duopoly model in which exit occurs because of the existence of fixed costs or opportunity costs each firm enters the market knowing its own cost but not that of its opponent as times goes on each firm becomes increasingly pessimistic about the cost of its remaining rival the time of exit is the only strategic variable so that our model is a war of attrition in contrast to the classic war of attrition however we assume that with positive probability each firm s costs may be low enough that staying in forever is a dominant strategy thus our model unlike the classic one has a unique equilibrium

timing of investments in oligopoly under uncertainty a framework for numerical analysis abstract we present a modeling framework for the analysis of investments in an oligopoly market for a homogenous commodity the demand evolves stochastically and the firms carry out investment projects in order to adjust their production cost functions or production capacities the model is formulated as a discrete time state space game where the firms use feedback strategies the firms are assumed to move sequentially to ensure a unique markov perfect nash equilibrium once the equilibrium has been solved monte carlo simulation is used to form probability distributions for the firms cash flow patterns and accomplished investments such information can be used to value firms operating in an oligopoly market an example of the model is given in a duopoly market the example illustrates the trade off between the value of flexibility and economies of scale under competitive interaction

irreversible investment under uncertainty in oligopoly abstract an oligopoly is studied where firms facing a stochastic inverse demand curve use capacity as strategic variable capacity may be adjusted continuously over time with linear cost the analysis uses the technique of a fictitious social planner and the theory of irreversible investment under uncertainty examples indicate that qualitatively the price process will be similar in oligopoly and competitive equilibrium when firms are nonidentical e g in initial size and even if they are alike in other respects substantial time may pass until they are all the same size much of that time one firm may dominate the market

evaluation of firm s loss due to incomplete information in real investment decision abstract we investigate the effect of incomplete information in a model where a start up with a unique idea and technology pioneers a new market but will eventually be expelled from the market by a large firm s subsequent entry we evaluate the start up s loss due to incomplete information about the large firm s behavior we clarify conditions under which the start up needs more information about the large firm the proposed method of evaluating the loss due to incomplete information could also be applied to other real options models involving incomplete information

optimal exercise of jointly held real options a nash bargaining approach with value diversion this paper provides a two stage decision framework in which two or more parties exercise a jointly held real option we show that a single party s timing decision is always socially efficient if it precedes bargaining on the terms of sharing however if the sharing rule is agreed before the exercise timing decision is made then socially optimal timing is attained only if there is a cash payment element in the division of surplus if the party that chooses the exercise timing can divert value from the project then the first best outcome may not be possible at all and the second best outcome may be implemented using a contract that is generally not optimal in the former cases our framework contributes to the understanding of a range of empirical regularities in corporate and entrepreneurial finance

stochastic competitive entries and dynamic pricing abstract how should firms price new products when they do not know the timing nor the nature of the next competitive entry to guide managers pricing decisions in such contexts we propose a dynamic pricing model with two types of randomly timed entry i e imitative and innovative the characterization of the equilibrium strategies reveals how optimal prices vary with the manager s knowledge about the timing of future competitive entries we show that price skimming is not always optimal when entry dates are unknown to managers everything else equal we demonstrate that the randomness of competitive entries make forward looking managers to choose constant prices even though the characteristics of the market would have justified skimming the demand in the normal course moreover we show that the constant pricing policy remains optimal even when the incumbent s optimal pricing strategy influences the probability of facing a competitive entry finally we find that uncertainty does not necessarily hurt firms profits

pre commitment and flexibility abstract this paper considers several related strategic duopoly settings in which uncertainty creates an option value from retaining flexibility by delaying investment or output decisions until after uncertainty is resolved this value of flexibility must be weighed against the strategic value of pre commitment yielding a trade off between flexibility and pre commitment we obtain a simple characterization of the timing of output decisions as a consequence of the degree of uncertainty particular attention is paid to the implications for entry deterrence by an incumbent firm and to the possible flexibility enhancing effects of investment in capital

investment uncertainty and pre emption 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

option exercise games an application to the equilibrium investment strategies of firms under the standard real options approach to investment under uncertainty agents formulate optimal exercise strategies in isolation and ignore competitive interactions however in many real world asset markets exercise strategies cannot be determined separately but must be formed as part of a strategic equilibrium this article provides a tractable approach for deriving equilibrium investment strategies in a continuous time cournot nash framework the impact of competition on exercise strategies is dramatic for example while standard real options models emphasize that a valuable option to wait leads firms to invest only at large positive net present values the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold copyright 2002 oxford university press

investment in competitive equilibrium the optimality of myopic behavior there is an extensive literature on the optimal irreversible investment strategy of a solitary firm facing an exogenous price process this paper shows that the investment strategies that this literature derives may be optimal in competitive equilibrium even though the price process is now endogenous this provides a simple means for computing equilibrium investment strategies

real options and preemption under incomplete information abstract this paper introduces incomplete information and preemption into an equilibrium model of firms facing real investment decisions the optimal investment strategy may lie anywhere between the zero npv trigger level and the optimal strategy of a monopolist depending on the distribution of competitors costs and the implied fear of preemption our model implies that the equity returns of firms which hold real options and are subject to preemption will contain jumps and positive skewness

investment timing and learning externalities abstract we study a duopoly model of investment in which each player learns about the quality of a common value project by observing some public background information and possibly the experience of his rival investment costs are private information and the background signal takes the form of a poisson process conditional on the quality of the project being low the resulting attrition game has a unique symmetric equilibrium which depends on initial public beliefs we determine the impact of changes in the cost and signal distributions on investment timing and how equilibrium is affected when a first mover advantage is introduced

the inefficiency of the poll tax abstract aggregate excess burden arising when a poll tax or uniform lump sum tax is replaced by an excise tax is examined if preferences are identical and homothetic then the aggregate excise burden is always non negative and independent of the distribution of income an example with non homothetic preferences is given however where the aggregate excess burden is negative the implications for policy and positive public finance are briefly discussed

strategic entry in a triopoly market of firms with asymmetric cost structures abstract this paper examines the strategic investment timing decision in a triopoly market comprising firms with asymmetric cost structures we present three novel results first in the case where there are relatively small cost asymmetries between firms and a relatively small first mover advantage the firm with the lowest cost structure is not always the first investor in other cases the firm with the lowest cost structure is the first investor second an increase in volatility increases the possibility that a firm without the lowest cost structure is the first investor finally even in the three asymmetric firm model we show that the first investor threshold is larger in a triopoly than in a duopoly although it is smaller in a duopoly than in a monopoly

exit in duopoly under uncertainty this paper examines a declining duopoly where the firms must choose when to exit from the market the uncertainty is modeled by letting the revenue stream follow a geometric brownian motion we consider the markovperfect equilibrium in firms exit strategies with a low degree of uncertainty there is a unique equilibrium where one of the fi rms always exits before the other however when uncertainty is increased another equilibrium with the reversed order of exit may appear ruining the uniqueness whether this happens or not depends on the degree of asymmetry in the firm specifi cp arameters

uncertainty and stepwise investment we analyze the optimal investment strategy of a firm that can complete a project either in one stage at a single freely chosen time point or in incremental steps at distinct time points the presence of economies of scale gives rise to the following trade off lumpy investment has a lower total cost but stepwise investment gives more flexibility by letting the firm choose the timing individually for each stage our main question is how uncertainty in market development affects this trade off the answer is unambiguous and in contrast with a conventional real options intuition higher uncertainty makes the single stage investment more attractive relative to the more flexible stepwise investment strategy

open loop equilibria and perfect competition in option exercise games the investment boundaries defined by grenadier 2002 for an oligopoly investment game determine equilibria in open loop strategies as closed loop strategies they are not equilibria because any firm by investing sooner can preempt the investments of other firms and expropriate the growth options the perfectly competitive outcome is produced by closed loop strategies that are mutually best responses in this equilibrium the option to delay investment has zero value and the simple npv rule is followed by all firms the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

investment in oligopoly under uncertainty the accordion effect this paper studies investments in new markets where more than two anticipated identical competitors are present in case of three firms an accordion effect is detected an exogenous demand shock results in a change of the wedge between investment thresholds of the first and second investor that is qualitatively different from the change of the wedge between the second and third investment threshold furthermore it turns out that in the three firm case the investment timing of the first investor lies in between the one and the two firm case these results are numerically extended to the n firm case

competition through capacity investment under asymmetric existing capacities and costs this paper discusses the way that different operational characteristics including existing capacity scale economies and production policy have an important influence on the capacity outcomes when firms compete in the market place we formulate a game theoretical model where each firm has an existing capacity and faces both fixed and variable costs in purchasing additional capacity specifically the firms simultaneously or sequentially make their expansion decisions and then simultaneously decide their production decisions with these outputs being capacity constrained we also compare our results with cases where production has to match capacity by characterizing the firms capacity and production choices in equilibrium our analysis shows that the operational factors play a crucial role in determining what happens the modeling and analysis in the paper gives insight into the way that the ability to use less production capacity than has been built will undermine the commitment value of existing capacity if a commitment to full production is not possible sinking operational costs can enable a firm to keep some preemptive advantage we also show that the existence of fixed costs can introduce cases where there are either no pure strategy equilibrium or multiple equilibria the managerial implications of our analysis are noted in the discussion our central contribution in this paper is the innovative integration of the strategic analysis of capacity expansion and well known s s policy in operations and supply chain theory

second mover advantages in the strategic adoption of new technology under uncertainty abstract this paper introduces technological uncertainty into a timing game of new technology adoption it is shown that the timing neither necessarily involves first mover advantages in precommitment equilibria reinganum review of economic studies xlviii 1981 395 405 nor rent equalization due to the threat of preemption fudenberg and tirole review of economic studies lii 1985 383 401 rather there may be second mover advantages because of informational spillovers furthermore the model predicts that the equilibrium payoffs will typically be discontinuous and non monotonic in the probability that the new technology is profitable a welfare analysis reveals several market failures and suggests that policy intervention should adequately depend on the nature of uncertainty and the rate of technological progress

the devolution of declining industries in declining industries capacity must be reduced in order to restore profitability who bears this burden where production is all or nothing there is a unique subgame perfect equilibrium the largest firms exit first ghemawat and nalebuff 1985 in this paper firms continuously adjust capacity again there is a unique subgame perfect equilibrium all else equal large firms reduce capacity first and continue to do so until they shrink to the size of their formerly smaller rivals intuitively bigger firms have lower marginal revenue and correspondingly greater incentives to reduce capacity this prediction is supported by empirical findings

developing real option game models by mixing concepts from both game theoretic analysis and real options theory an investment decision in a competitive market can be seen as a game between firms as firms implicitly take into account other firms reactions to their own investment actions we review two decades of real option game models suggesting which critical problems have been solved by considering game theory and which significant problems have not been yet adequately addressed we provide some insights on the plausible empirical applications or shortfalls in applications to date and suggest some promising avenues for future research

entry into the electricity market uncertainty competition and mothballing options the present paper analyzes the entry strategies into the electricity market of two firms that have power plants under price uncertainty and competition we consider the symmetric and asymmetric two firms which have either a thermal power plant or a nuclear power plant the differences between the thermal power plant and the nuclear power plant such as the cost structure and operational flexibility are modeled the threshold values of market entry are calculated for each firm with either the thermal power plant or the nuclear power plant as the leader or the follower we show the dependence of cost structures on entry thresholds of the leader and the follower into the electricity market for various market and cost conditions the diagrams of the leader are also shown

irreversible investment with price ceilings a model of irreversible investment in a competitive industry under demand uncertainty is developed in the absence of restrictions investment by itself will keep the price from rising above a natural ceiling that exceeds the long run average cost by an option value factor when a lower ceiling is imposed investment is triggered only by the observation of an even higher shadow price as the imposed ceiling is reduced to the long run average cost this shadow price goes to infinity and investment ceases completely because investment is depressed a tighter price ceiling generally leads to a higher long run average price

preemption and rent equalization in the adoption of new technology we study the adoption of a new technology to illustrate the effects of preemption in games of timing we show that the threat of preemption equalizes rents in a duopoly but that this result does not extend to the general oligopoly game if the gain to preemption is sufficiently small then the optimal symmetric outcome which involves late adoption is an equilibrium this contrasts with reinganum s result that in precommitment equilibria there must be diffusion we develop a new and richer formalism for modeling games of timing which permits a continuoustime representation of the limit of discrete time mixed strategy equilibria

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

preemption and rent dissipation under price competition abstract we study a simple duopoly model of preemption with multiple investments and instantaneous price competition on a market of finite size driven by stochastic taste shocks different patterns of equilibria may arise depending on the importance of the real option effect if the average growth rate of the market is close to the risk free rate or if the volatility of demand shocks is high no dissipation of rents occurs in equilibrium despite instantaneous price competition if these conditions do not hold the equilibrium investment timing is suboptimal and the firms long run capacities may depend on the initial market conditions our conclusions contrast sharply with standard rent dissipation results

strategic capacity investment under uncertainty this article considers investment decisions within an uncertain dynamic and duopolistic framework each investment decision involves to determine the timing and the capacity level the simultaneous analysis of timing and capacity decisions extends work on entry deterrence accommodation to consider a timing delay element we find that when applying an entry deterrence policy the first investor or incumbent overinvests in capacity for two reasons first it delays the investment of the second investor or entrant second the entrant will invest in less capacity we also find that greater uncertainty makes entry deterrence more likely

the effect of borrowing constraints on consumer liabilities this paper explores the effects of liquidity constraints on consumer liabilities while much empirical evidence attests to the importance of liquidity constraints in the u s economy evidence about the effects of borrowing constraints on consumer balance sheets is scarce using the 1983 survey of consumer finances data we estimate desired borrowing for unconstrained households we then evaluate the gap between predicted and observed debt for the sample of liquidity constrained consumers predicted debt is 75 percent higher than actual debt in the liquidity constrained sample thus the effect of removing borrowing constraints has quantitatively important implications for the allocation of debt in the household portfolio the removal of borrowing constraints would raise aggregate household liabilities by 9 percent copyright 1993 by ohio state university press

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon

real options in strategic investment games between two asymmetric firms abstract this paper examines strategic investment games between two firms that compete for optimal entry in a project that generates uncertain revenue flows under asymmetry on both the sunk cost of investment and revenue flows of the two competing firms we investigate the value of real investment options and strategic interaction of investment decisions compared to earlier models that only allow for asymmetry on sunk cost our model demonstrates a richer set of strategic interactions of entry decisions we provide a complete characterization of pre emptive dominant and simultaneous equilibriums by analyzing the relative value of leader s and follower s optimal investment thresholds in a duopoly market with negative externalities a firm may reduce loss of real options value by selecting appropriate pre emptive entry when one firm has a dominant advantage over its competitor both the dominant firm and dominated firm enter at their respective leader s and follower s optimal thresholds when the pre emptive thresholds of both firms happen to coincide the two firms enter simultaneously under positive externalities firms do not compete to lead