a contingent claims analysis of optimal investment subsidy this paper uses contingent claims analysis to answer two questions i why are some subsidy markets apparently slow in attracting an optimal subsidy when others are not and ii what can be done about it the lack of activity in the green investment subsidy markets has been a concern as it appears optimal that countries should offer such support from a welfare point of view but progress has nonetheless been stalling which motivates this paper we show that free riding which is likely to affect the green subsidy market cools down the subsidy market with harmful welfare effects and preemption which is likely to affect the more active fdi subsidy market overheats the subsidy market with similarly harmful effects the theory dictates a taxation scheme that offsets these effects to restore the welfare to its maximum point

access pricing and investment with stochastically growing demand abstract this paper examines the effect of access charges on firms incentives to invest in a network facility with a stochastically growing demand an access to bypass equilibrium is characterized in terms of an access charge and a level of network investment cost in the equilibrium a leader first enters a market by building a new network then a follower makes a sequential investment for the construction of an additional network after accessing the incumbent s network in an open access environment we confirm that the incentive for preemption can be enhanced by an increase in the access charge

the walking debt crisis abstract this article sheds light on the question whether arising sovereign credit risk in the emu has been triggered by the us subprime crunch by adapting recent econometric methodologies suggested in the related field of speculative bubbles we find clear evidence for fast diverging and even explosive behavior of emu government bond yields of peripheral countries relative to germany during the financial and the european debt crisis this might be caused by flight to quality effects to german government bonds coincident with the collapse of lehman brothers and by a loss of confidence in the fiscal stability of greece ireland italy portugal and spain during the european debt crisis first we find compelling evidence for bubbles in the dow jones equity real estate investment trusts reits index which serves as a weekly measure of economic activity in the north american real estate sector second in our main analysis we test whether the collapsing bubble in the housing market triggered the diverging government bond yields during two crisis regimes our findings indicate that this was the case in the course of the financial crisis but not during the emu sovereign debt crisis these results suggest that the severe fiscal problems in peripheral countries are homemade rather than imported from the us

the effect of information streams on capital budgeting decisions in this paper a new decision rule for capital budgeting is considered a firm has the opportunity to invest in a project of uncertain profitability over time the firm receives additional information in the form of signals indicating the profitability of the project the belief that the firm needs to have in a profitable project for investment to be optimal is calculated and analyzed it is shown that the probability of investing in a project with low profitability is larger when the firm uses a conventional rule like the net present value rule as a counterintuitive result it is obtained that it can be optimal to undertake the investment at a later point in time in case the expected number of signals per time unit is higher also an error measure is discussed that indicates the accuracy of capital budgeting rules in this stochastic environment

co development ventures optimal time of entry and profit sharing we find the optimal time for entering a joint venture by two firms and the optimal linear contract for sharing the profits we consider risk sharing timing incentive and asymmetric decisions contract designs if the firms are risk neutral and the cash payments are allowed all three designs are equivalent with risk aversion the optimal contract parameters may vary significantly across the three designs and across varying levels of risk aversion we also analyze a dataset of joint biomedical ventures in which in agreement with our theoretical predictions both royalty and cash payments are mostly increasing in the smaller firm s experience and the time of entry happens sooner for more experienced small firms

on the role of demand and strategic uncertainty in capacity investment and disinvestment dynamics abstract even mature industries seldom settle down into a long run steady state fluctuations in demand disrupt the status quo and call for firms to adjust their capacities on an ongoing basis we construct a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment disinvestment decisions in addition to uncertainty about the evolution of demand a firm faces strategic uncertainty concerning the decisions of its rivals we numerically solve the model for its markov perfect equilibria for one set of parameter values three equilibria exist and while all of them have simple intuitive structures they exhibit widely varying patterns of response to demand shocks at one extreme one firm dominates the industry almost as a monopolist and changes its capacity to accommodate demand at the other extreme the larger firm keeps its capacity nearly constant while the smaller firm acts as the swing producer

investment policy with time to build abstract most capital projects have an implementation lag we examine the effect of implementation lag on a levered firm s investment decision the main finding is that implementation lag can potentially have a substantial effect on a levered company s investment trigger and this effect can be significantly different from that of an unlevered company the exact relationship between lag and investment trigger depends on the level of debt used by the firm for an optimally levered firm a crucial determinant of the lag investment relationship is the fraction of investment cost that has to be incurred upfront if this fraction is small investment trigger is a decreasing function of implementation lag and the effect can be economically significant if this fraction is large investment trigger can be either increasing or decreasing in lag depending on parameter values but the magnitude of the effect is not large optimally levering a firm makes the implementation lag more investment friendly relative to an unlevered firm thus it is possible that the lag has a negative effect on investment if the firm is unlevered but a positive effect if the same firm is optimally levered for an optimally levered firm implementation lag generally has a non negative effect on investment

uncertain regulatory timing and market dynamics abstract using a dynamic model of capacity accumulation i examine the relationship between uncertainty about the timing of a new pigouvian tax and oligopolistic competition i find that for some market structures uncertainty about the timing of the regulatory change leads firms to increase investment these results stem from the nature of the uncertainty and its interaction with firms strategic incentive to engage in capacity races they dramatize the importance of accounting for initial conditions when forecasting firms reactions to anticipated regulatory changes in addition i find that more protracted uncertainty leads to greater welfare costs

informational externalities strategic delay and optimal investment subsidies this paper examines optimal government policy when private investment generates information but investors cannot internalize the informational value their actions have to others equilibrium exhibits inefficient delay as investors adopt a wait and see approach the government can alter incentives via an investment subsidy but complications arise since future subsidies may induce investors to disregard current policy initiatives the paper shows that the government achieves its desired outcome only when the the investment subsidy is financed by a non distortionary lump sum tax when taxation is distortionary the government faces a time inconsistency problem that may prevent effective policy ce texte examine la politique optimale du gouvernement quand l investissement prive engendre de l information mais que les investisseurs ne peuvent pas internaliser la valeur informationnelle que leurs actions ont sur les autres l equilibre est marque par des delais inefficaces a proportion que les investisseurs adoptent une attitude attendre pour voir le gouvernement peut modifier les incitations en creant une subvention a l investissement mais des complications sont possibles puisque des subventions possibles dans l avenir peuvent amener les investisseurs a ne pas se prevaloir des initiatives mises de l avant par la politique courante le texte montre que le gouvernement atteint le resultat desire seulement quand la subvention a l investissement est finance par une taxe forfaitaire non distorsionnante quand la taxe cree des distorsions le gouvernement fait face a un probleme d inconsistance dans le temps qui empeche que la politique soit effective

debt in industry equilibrium this article shows 1 how entry and exit of firms in a competitive industry affect the valuation of securities and optimal capital structure and 2 how given a trade off between tax advantages and agency costs a firm will optimally adjust its leverage level after it is set up we derive simple pricing expressions for corporate debt in which the price elasticity of demand for industry output plays a crucial role when a firm optimally adjusts its leverage over time we show that total firm value comprises the value of discounted cash flows assuming fixed capital structure plus a continuum of options for marginal increases in debt article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

optimal debt endogenous fertility and human capital externalities in a model with altruistic bequests abstract this paper explores optimal debt in a model with altruistic bequests endogenous fertility and human capital externalities because of such externalities education investment is too low and fertility is too high while education subsidies are the conventional means to deal with these problems we show that the optimal policy also comprises debt even when distortionary taxes are used the reason is that debt tips the usual trade off between children s quantity and quality in favor of the latter by increasing the bequest cost of children the optimal debt output ratio exceeds 10 for plausible parameterization

investment under uncertainty and time inconsistent preferences abstract while standard real options models assume that agents possess a constant rate of time preference there is substantial evidence that agents are impatient about choices in the short term but are patient when choosing between long term alternatives we extend the real options framework to model the investment timing decisions of entrepreneurs with time inconsistent preferences the impact on investment timing depends on such factors as whether entrepreneurs are sophisticated or naive in their expectations regarding their future time inconsistent behavior and whether the payoff from investment occurs all at once or over time the model is extended to the case of a competitive equilibrium

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

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

money and endogenous growth the ramsey romer model of endogenous growth is extended to allow for holdings of real money balances and government debt as well as capital and for non interconnected generations of households tax financed increases in government consumption and debt depress growth prospects and boost inflation as long as a positive birth rate ensures that future taxes are shouldered by future yet unborn generations debt financed increases in government consumption depress growth and boost inflation even more money financed increases in government consumption depress growth less but increase inflation by more giving subsidies through an increase in monetary growth is non neutral since this increases real growth and thus inflation increases by a lesser amount than monetary growth bond financed increases in monetary growth lead to a larger increase in real growth and a smaller increase in inflation if there are cost adjustment for investment cuts in monetary growth and increases in government debt and government consumption induce an increase in the real interest rate copyright 1994 by ohio state university press

competition and irreversible investments abstract incumbent monopolists frequently claim that the introduction of competition will reduce future profits and therefore delay future investments in this paper we show that not only is this not generally true but in the oligopolistic industry model of dixit and pindyck investment under uncertainty 1994 this is never the case we extend this result to situations in which investments have positive externalities and situations in which the monopolist has multiple investment opportunities

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

considering the investment decisions with real options games approach abstract the mix of games theory with the real options has been a dynamic range of exploration in the most recent decade the engaging quality of the specialists for displaying aggressive speculation choices by blending ideas from both hypotheses is on account of a venture choice in a focused business sector can be seen in its substance as a game between firms in this paper we expand a model to consider finite horizon real option games under incomplete information with various parameters in incomplete information games firms actions express significant information about profitability to contestants the encapsulation of this information proposed original blocks in models with strategic interactions this is because of circularity where best exercise decisions are based on previous decisions taken which at a given time are quiet to be mentioned because about the dynamic programming principle we expand an extended version of the least squares monte carlo algorithm to confront these results the model can aid in understanding the relation between strategic optionality and information besides how this influences the best decision policy and its value results we find the informational feature is of great significance for firms best decision policy and optimization of project values

religion and female educational attainment the paper reviews the literature on the education gender and religion nexuses and identifies plausible hypotheses that religion adversely affects female education the link between major religions and female educational attainment is examined using the barro lee data set for a sample of 97 countries the estimates include control variables for colonial heritage urbanization labor force participation and young adult mortality the estimates show powerful negative links between female educational attainment and the proportion of ethnoreligions hindu and muslim adherents in a country with similar results for the gender gap the paper offers some interpretative thoughts and research agendas

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

on barro s theorem of debt neutrality the irrelevance of net wealth the effects of national debt on real economic activity has been a recurring topic in the literature on macroeconomic policy analysis since the time of adam smith the problem is usually stated as follows for a given level of government spending is the economy sensitive to the financing mix between tax and debt historically attention has focused on the question of whether or not individuals perceive government bonds as net wealth the link between wealth and real activity being taken as given the main point of debate is well established the issue of bonds raises private assets by the full value of the bonds the corresponding tax liabilities for interest payments and retirement of the debt extend indefinitely into the future the perception of bonds as net wealth would then appear to depend on the length of the individual s optimization horizon the most recent contribution to this debate was made by robert barro 1974 in which he argued that despite the limitation of finite lives bonds will not be regarded as net wealth in a system characterized by operative intergenerational transfers the essence of his argument is that inclusion of a bequest motive effectively converts a finite horizon into an infinite one in that paper barro acknowledged a potential limitation on his proof of the neutrality result it was only valid for bonds that are redeemed at a known point in the future this limitation was raised again in a subsequent exchange with martin feldstein in which barro 1976 agreed that for a growing economy an increase in steady state per capita debt will generate net wealth if the rate of growth is greater than the interest rate however he argued that such a steadystate growth situation would not be consistent with rational utility maximizing behavior the main theme of this paper is that the literature has focused attention on the wrong question the real effects of national debt are independent of whether or not individuals perceive the debt as net wealth the correct question is whether or not changes in the level of debt force individuals into patterns of intertemporal consumption that they are unable to neutralize by adjustments in their portfolio behavior viewing neutrality in this light leads to some reinterpretation of the conditions under which neutrality is likely to hold my analysis starts where barro and feldstein leave off within the framework of the overlapping generations model with gift and bequest motives i show that steady state equilibrium growth is consistent with a growth rate in excess of the interest rate indeed without specific knowledge of the parameters of the economy there are no a priori grounds on which to expect any particular relationship between the growth and interest rates more importantly so long as it is valid to view the aggregate economy as behaving like a composite individual changes in the steady state level of government debt are neutral regardless of which relationship prevails provided one or the other of the intergenerational transfer motives is operative i will refer to this as the extended neutrality theorem section i presents an analysis of steadystate growth with gift and bequest behavior the steady state growth path is shown to lie above the golden rule solution if the gift

a patent race in a real options setting investment strategy valuation capm beta and return volatility abstract in this paper we study financial properties of r d intensive firms through a continuous time real options patent race model numerical analysis in this study shows that intense competition drives a firm to invest more aggressively which then pushes up its cost of capital and return volatility while introducing negative return correlation with its competitor furthermore we find that a firm s position in competition has important impacts on its financial properties for instance a firm s cost of capital is a non monotonic function of its relative position in the race in addition the relationship between cash flow uncertainty and investment can be negative when a firm is far ahead or far behind or positive when firms are close in the race

a dynamic duopoly investment game without commitment under uncertain market expansion abstract we model capacity building investments in a homogeneous product duopoly facing uncertain demand growth capacity building is achieved through the addition of production units that are durable and lumpy and whose cost is irreversible while building their capacity over time firms compete a la cournot in the product market given their installed capacity there is no exogenous order of moves no commitment regarding future decisions and no finite horizon we investigate markov perfect equilibrium mpe paths of the investment game which may include episodes during which firms invest at different times a preemption pattern and episodes in which firms invest simultaneously a tacit collusion pattern these episodes may alternate and are typically several when firms have yet to invest in capacity the sole pattern that is mpe compatible is a preemption episode firms invest at different times but have equal value the first such investment may occur earlier and therefore be riskier than socially optimal when both firms hold capacity tacit collusion episodes may be mpe compatible firms invest simultaneously at a postponed time hence holding back production in the meantime thereby generating an investment wave in the industry such investment episodes are more likely with higher demand volatility faster market growth and lower cost of capital discount rate

the effects of social security on population and output growth in this paper we have considered two unfunded social security programs under the conventional system benefits are related to aggregate fertility under the hypothetical fertility related system benefits are directly linked to individual fertility the effects on fertility and per capita growth rates of the two social security systems are examined in the context of endogenous growth the relative merits of the two systems for developing and developed countries are considered the authors conclude that the conventional social security system existing in many developed nations may be desirable to developing countries in reducing population and promoting economic growth on the other hand the hypothetical fertility related system may be useful to developed countries as far as increasing fertility is concerned

multi stage product development with exploration value enhancing preemptive and innovation options abstract we provide a real options framework for the analysis of product development that incorporates research and exploration actions product attribute value enhancing actions with uncertain outcome as well as preemption and innovation options we derive two stage analytic formulas and propose a general multi period solution using a numerical lattice approach our analysis reveals that exploration actions are more important when the project is out or at the money near zero npv and less important for high project values in a multi stage setting exploration actions are important even for in the money projects when follow on actions exist that can enhance the expected value of the project with path dependency early actions are more valuable since they enhance the impact or reduce the cost of subsequent actions preemptive controls affecting rare event jump frequency and innovations that introduce positive jumps are more valuable for firms with higher frequency of competitive threats involving low volatility

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

real options theory in international business the last quarter century has witnessed substantial growth in applications of real options theory rot to international business ib research in this review we explicate the core rot concepts in the ib context and discuss the contributions of rot based research to three core ib issues timing and scale of market entry or exit entry mode and governance form and the role of multinational networks based on our review we propose a holistic rot view of the multinational enterprise that synthesizes the insights of existing studies finally to move the field forward we highlight key questions and challenges in current rot based work provide a more precise definition of exogenous and endogenous uncertainty suggest empirical designs to test unique rot predictions and explore areas where rot can be combined with other theoretical perspectives to better understand ib phenomena

strategic real options under asymmetric information abstract this paper studies the effect of private information on the capital allocation decisions of firms who operate under imperfect competition i analyze two interactive firms one with private information and the other without who must decide when to undertake an irreversible and uncertain investment decision traditional non strategic models of irreversible investment under uncertainty involve a single decision maker and result in an optimal period of delay before the investment is undertaken in a strategic setting firms must balance their desire to delay against competitive advantages from early investment i find that an equilibrium may not exist within the standard continuous framework when the private information is over revenues moreover when an equilibrium does exist the competitive pressures from the uninformed firm are weak this is in contrast to existing models with asymmetric information over costs where an equilibrium always exists and the competitive pressures remain strong hsu and lambrecht 2007 this work shows that the investment timing decision and thus the value of the private information is highly sensitive to the nature of incomplete information

investment under uncertainty and policy change in this paper the impact of a policy change on the investment behavior of the firm is studied in an incomplete information setting the policy change occurs when a stochastic process describing the state of the economic environment reaches a certain trigger the firm has incomplete information about the trigger and knows only its probability distribution consequently both the firm s conjecture concerning the trigger value as well as the precision of this conjecture serve as input parameters we derive the optimal investment rule maximizing the value of the firm and show that the impact of the trigger value uncertainty on the optimal investment threshold is non monotonic the threshold decreases with uncertainty for its low levels while the reverse is true if uncertainty is high furthermore we provide results concerning the valuation of the firm s investment opportunity and present some policy implications

irreversible investment and r d spillovers in a dynamic duopoly investments in new production processes usually involve a significant amount of rd an increase in uncertainty delaying the equilibrium calls for higher subsidization rates third numerical simulations show that the spillover reduces the difference between the leader s and the follower s maximum value functions accordingly our model can help generate realistic market betas

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

a bayesian approach to real options the case of distinguishing between temporary and permanent shocks traditional real options models demonstrate the importance of the option to wait due to uncertainty over future shocks to project cash flows however there is often another important source of uncertainty uncertainty over the permanence of past shocks adding bayesian uncertainty over the permanence of past shocks augments the traditional option to wait with an additional option to learn the implied investment behavior differs significantly from that in standard models for example investment may occur at a time of stable or decreasing cash flows respond sluggishly to cash flow shocks and depend on the timing of project cash flows during the past two decades the real options approach to valuation of irreversible investment opportunities has become part of the mainstream literature in financial economics the central idea is that the opportunity to invest is equivalent to an american call option on the underlying investment project as a consequence the problem of optimal investment timing is analogous to the optimal exercise decision for an american option applications of the real options approach are now numerous 1 one feature that is common to virtually all real options models is that the underlying uncertainty pertains only to future shocks since future cash flows are uncertain there is an important opportunity cost of investing today the value of the asset might go up so that tomorrow will be an even better time to invest this opportunity cost is often referred to in the literature as the option

government debt human capital and endogenous growth the effect of government debt on capital accumulation has been debated for more than a century the debate has focused on the validity of the ricardian equivalence hypothesis which asserts that the mix of government debt and nondistorting taxes to finance government expenditures has no real effect on an economy in models with infinitely lived agents government bonds increase private assets by the full amount that offsets the rise in future tax liabilities for interest payments and the retirement of public debt even in a model with finitely lived agents barro 1 showed that government debt is neutral when private intergenerational transfers are positive and when the rate of growth is lower than the interest rate with operative intergenerational transfers carmichael 4 extended the debt neutrality into a regime where the rate of growth is greater than the interest rate while suggesting some sources of nonneutrality of public debt such as heterogeneous tastes and uncertainty moreover drazen 6 argued that when intergenerational transfers take the form of investments in human capital which have higher marginal returns than investments in physical capital government bonds affect the equilibrium solution and increase welfare in contrast assuming that private intergenerational transfers are zero van der ploeg and alogoskoufis 10 argued that an increase in government debt depresses real growth through reducing savings in an endogenous growth overlapping generations model with constant population the models mentioned above ignore possible responses of fertility to changes in government debt in an overlapping generations model with operative bequests becker and barro 3 showed that the neutrality of social security needs modification if fertility is endogenous lapan and enders 9 extended the insight of becker and barro 3 to examine the effects of government debt and found that a rise in government debt reduces fertility and raises capital intensity through increasing bequests which are part of the cost of having children wildasin 11 also obtained similar results while endogenizing fertility none of these models has endogenous growth of per capita income

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

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

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

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

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

the housing and credit bubbles in the united states and europe a comparison a house price boom occurred simultaneously in the united states and in a number of european countries from 2003 to 2007 accompanied in each case by an expansion in housing finance this article considers the role of financial innovation along with incomplete markets in these cycles

equilibrium and options on real assets in aggregate options on real and financial assets can have very different properties typically the good or service produced by a real asset has a finite elasticity of demand and developers have finite capacities also the supply of options can be limited and developers can be less than perfectly competitive in a subgame perfect nash equilibrium with these properties the optimal exercise policy and resulting values of developed and undeveloped assets are calculated explicitly the novel comparative statics are discussed in detail article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

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

conference on housing stability and the macroeconomy international perspectives this article provides an introduction to the jmcb special issue on housing bubbles the global financial crisis and the ensuing recessions in countries that experienced housing busts we focus on five themes that are important for policymakers and researchers alike the domestic and international factors driving housing booms and busts the relevance of the housing sector for the real economy how monetary policy should react to housing booms and busts how housing and mortgage finance reform could affect financial stability and the broad lessons learned for macroeconomics and macroprudential policy

the role of intergenerational transfers in aggregate capital accumulation this paper uses historical u s data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation the evidence presented indicates that intergenerational transfers account for the vast majority of aggregate u s capital formation only a negligible fraction of actual capital accumulation can be traced to life cycle or hump savings a major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age earnings and age consumption profiles these profiles are simply too flat to generate substantial life cycle savings this paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers life cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers

endogenous fertility ricardian equivalence and debt management policy abstract the paper develops a model in which dynastic families optimally determine fertility government debt represents a tax on future generations and on childbearing the ricardian equivalence hypothesis does not hold debt is welfare reducing in that it distorts the fertility decision an increase in government debt induces a decline in fertility and an increase in the steady state capital labor ratio if a government inherits an existing stock of debt the first best policy is to eliminate the debt immediately in other situations the optimal debt management policy will not in general entail a total elimination of the debt

second best public debt with human capital externalities this paper studies optinnal public debt in a dynastic model with human capital externalities that cause human capital investment fertility to be below above its socially optimal level by reducing fertility and raising human capital investment the optimal debt can exceed 10 of output for plausible parameterizations

the impacts of uncertainties in a real options model under incomplete information abstract this paper examines the impact with respect to the uncertainty of the underlying state variable profit uncertainty on the real options model in a situation of incomplete information profit uncertainty has not incorporated into the real options model under incomplete information in that the underlying state variable is not formulated as the stochastic process see e g bernardo a e chowdhry e b 2002 resources real options and corporate strategy journal of financial economics 63 211 234 we extend the model developed by bernardo and chowdhry to formulate the underlying state variable as the stochastic process we conclude that profit uncertainty has the same type of impact on the real options value and its triggers both under complete and incomplete information

learning preemption and the degree of rivalry we examine a model in which all firms receive common signals as to the uncertain profitability of an investment whose actual payoffs are split only among those who develop the project earliest the benefit from preempting rivals yields an equilibrium reduction in the amount of learning and earlier development as the number or rivals increases the set of equilibria shrinks as the number of rivals gets large and in the limit only the competitive outcome occurs

induced effects and technological innovation with strategic environmental policy abstract this paper investigates an environmental policy designed to reduce the emission of pollutants under uncertainty where the agents problem is formulated as an optimal stopping problem we first analyze the single agent s case according to pindyck pindyck r s 2002 optimal timing problems in environmental economics journal of economic dynamics and control 26 1677 1697 we then extend the model to the case in which there are two competing agents therefore we consider the external economic effects that are peculiar to an agent s environmental policy decision finally we consider the effect of technological innovation the results of the analysis suggest that if there are two competing agents they implement environmental policy simultaneously furthermore the threshold for implementing environmental policy is higher when there are two agents and how long these two agents take to implement environmental policy depends on the magnitude of the external economic effect furthermore when we consider the effect of technological innovation we show that the incentive to be the leader occurs if an additional condition is satisfied

social security and endogenous growth abstract this paper examines the effects of social security on the steady state growth of per capita income in an endogenous growth model in which agents care about their own consumption the number of children and the welfare of each child it shows that an unfunded program may simulate growth by reducing fertility and increasing the ratio of human capital investment per child to per family income when bequests are positive also it may cause faster growth than funded programs especially when receipts from funded programs are independent of contributions when voluntary saving is positive funded social security is neutral if receipts are linked to contributions and most likely depresses growth if receipts are independent of contributions

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

preemption games with private information preemption games are widely used to model economic problems such as patent races we introduce private information into these games and allow for this information to stochastically change over time this reflects e g how r d competitors improve their innovations over time and keep these innovations secret before patenting them the analysis initially appears intractable because of the complexity of the equilibrium updating of beliefs on opponents information however we demonstrate the existence of a class of equilibria and calculate these equilibria in closed form we find that the expected durations in these equilibria are longer than when players information is public but in some cases shorter than in the collusive outcome hence r d secrecy slows down innovation disclosure

investment under regime uncertainty impact of competition and preemption abstract in this study we analyze the investment timing problem and introduce a model of two firms competing for investment preemption each of which knows in advance the time at which the economic condition that will have an impact on the investment changes we qualitatively show how two firms strategically optimize their investment timing taking into account competition and preemption

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

impact of bayesian learning and externalities on strategic investment we investigate the interplay between learning effects and externalities in the problem of competitive investments with uncertain returns we examine a game theoretic duopoly investment model in which i a firm can learn about the profitability of the investment by observing the performance of the first mover and ii externalities exist between the investments of two firms we find a region of a war of attrition between the two firms in which the interplay between externalities and learning gives rise to counterintuitive effects on investment strategies and payoffs in particular we find that contrary to the conventional war of attrition where an increase in benefits for the follower generally delays the first move an increase in the rate of learning which tends to benefit the follower can hasten the first investment this paper was accepted by james smith decision analysis

preemption games under levy uncertainty abstract we study a stochastic version of fudenberg tirole s preemption game two firms contemplate entering a new market with stochastic demand firms differ in sunk costs of entry if the demand process has no upward jumps the low cost firm enters first and the high cost firm follows if leader s optimization problem has an interior solution the leader enters at the optimal threshold of a monopolist otherwise the leader enters earlier than the monopolist if the demand admits positive jumps then the optimal entry threshold of the leader can be lower than the monopolist s threshold even if the solution is interior simultaneous entry can happen either as an equilibrium or a coordination failure the high cost firm can become the leader we characterize subgame perfect equilibrium strategies in terms of stopping times and value functions analytical expressions for the value functions and thresholds that define stopping times are derived

empirical evidence on consumption smoothing and intergenerational transfers in this study i examine empirically intergenerational linkage in terms of resources transfers in the extended family in particular conditional on a household s and its parents or children s liquidity constraints status i look at how far the household can smooth its consumption in face of negative income shocks the permanent income hypothesis postulates that households make their consumption decisions based on their lifetime resources thus their consumption trajectory follows a smooth path in face of shocks to their income however in various tests 8 10 the unconditional form of the hypothesis has been rejected it is conjectured and generally agreed that the rejections of the hypothesis are mainly due to the presence of liquidity constraints i e capital market imperfections see zeldes 22 for a recent empirical investigation and hayashi 12 for an excellent survey moreover the works by cochrane 4 and mace 19 further confer cogency on the liquidity constraints capital market imperfections argument in testing whether households have full consumption insurance or equivalently the existence of complete markets against idiosyncratic shocks they reject their null of the existence of full consumption insurance in some of their tests

the response of aggregate production to fertility induced changes in population age distribution with a particular focus upon long term supply effects the authors explored the implications of different population age distributions for the productive capacity of an economy a multilevel aggregate production process was specified plausible values assigned to its parameters and steady state solutions obtained under a range of alternative fertility assumptions the theoretical model was calibrated to conform with canadian data and published estimates of age sex substitution elasticities the study found productive capacity to be related to age distribution although the output effects exceed 8 regardless of the structure of the economy only when total fertility rate is less than 1 6 or well above 3 0 within the range of variation productive capacity and output per capita are lower for both younger and older populations altering the elasticity of substitution between different tasks has negligible effects upon the sensitivity of the economy to changes in age distribution altering the elasticity of substitution between different age sex groups for a given task has a markedly greater effect introducing either increasing or decreasing returns to scale has only a minor effect upon the sensitivity of the economy to changes in age distribution and marginal products are quite sensitive to changes in age distribution for both younger and older workers but far less sensitive for middle aged workers

strategic investment in technological innovations abstract the aim of this paper is to determine the optimal timing of technology investment of a single firm in a duopoly framework as time passes different technologies are invented which after sometime become available for the firm to adopt the question here is not only when a firm should invest but also which technology should be adopted for different scenarios the optimal technology investment decision is determined outcomes range from pre emption equilibria to equilibria with second mover advantages

political measures for strategic environmental policy with external effects this paper investigates an environmental policy designed to reduce the emission of pollutants under uncertainty with the agent problem as an optimal stopping problem we first analyze the two cases in which there are one agent and two competing agents by following ohyama and tsujimura 2005 when we consider a model of strategic agents we need to analyze the external economic effect that is peculiar to an agent s environmental policy implementation then to improve and resolve these external effects we examine three alternative political measures comprising an environmental subsidy an environmental tax and an emission trading system the results of the analysis indicate that the environmental subsidy and environmental tax promote environmental policy however they do not create an incentive to be the leader on the other hand an emissions trading system not only promotes environmental policy but also creates an incentive for leadership

investment timing asymmetric information and audit structure a real options framework abstract this paper examines investment timing by the manager in a decentralized firm in the presence of asymmetric information in particular we incorporate an audit technology in the agency model developed by grenadier and wang 2005 investment timing agency and information journal of financial economics 75 493 533 the implied investment trigger in the agency problem with auditing is larger than in the full information problem and smaller than in the agency problem without auditing nevertheless the audit technology does not necessarily reduce inefficiency in the total social welfare

strategic entry and market leadership in a two player real options game abstract we analyse the entry decisions of competing firms in a two player stochastic real option game when rivals earn different but correlated uncertain profitabilities from operating in the presence of entry costs decision thresholds exhibit hysteresis the range of which is decreasing in the correlation between competing firms a measure of the expected time of each firm being active in the market and the probability of both rivals entering within a finite time are explicitly calculated the former latter is found to decrease increase with the volatility of relative firm profitabilities implying that market leadership is shorter lived the more uncertain the industry environment in an application of the model to the aircraft industry we find that boeing s optimal response to airbus launch of the a380 super carrier is to accommodate entry and supplement its current product line as opposed to the riskier alternative of committing to the development of a corresponding super jumbo

investment and competition this paper examines how industry structure affects corporate investment patterns real options theory shows that deferring irreversible investment in the face of uncertainty is valuable theory also shows that the value of waiting to invest falls if investment opportunities are contestable consistent with these theories we find that firms in monopolistic industries exhibit lower investment q sensitivity and are slower to invest than firms in competitive industries however we find that investment q sensitivity and investment speed are highest in oligopolistic industries suggesting that the value of investing strategically can outweigh the value of waiting indeed oligopolistic industries experience less entry and more exit than other industries

competitive experimentation with private information the survivor s curse we study a winner take all r d race between two firms that are privately informed about the arrival rate of an invention over time each firm only observes whether the opponent left the race or not the equilibrium displays a strong herding effect that we call a survivor s curse unlike in the case of symmetric information the two firms may quit the race nearly simultaneously even when their costs and benefits for research differ significantly

government and the financing of health care over the past two decades government financing of health care has increased fourteenfold in 1960 prior to the enactment of the medicaid and medicare programs public expenditures on health care were 6 6 billion in 1965 they were 11 billion in 1975 56 billion and by 1979 they had reached 91 4 billion in addition there was a notable shift from state and local to federal outlays in 1960 state and local expenditures were slightly larger than federal expenditures by 1975 federal expenditures were twice the size of state local expenditures the focus of this paper is twofold i will examine both medicare and medicaid and an indirect health care subsidy namely tax expenditures this expenditure consists of losses in federal revenue resulting from tax savings for certain groups of taxpayers allowed by the tax code the logic of calling these revenue losses expenditures is that a reduction in tax liability is equivalent to an expenditure in the same way that a forgiveness of debt is equivalent to a payment congressional budget office in the case of health losses in federal revenue and thus savings to tax payers result from the exclusion of employer paid health insurance premiums from their employees taxable income and from the deductibility of certain medical expenses for the purpose of computing personal income tax liabilities regarding such tax expenditures on health as a major federal program is not a new concept nor is it unique to compare tax expenditures on health with the amounts spent on medicare and medicaid see for example martin feldstein and elizabeth allison eugene steuerle and ronald hoffman ronald vogel the contribution of the present paper is to provide better estimates of employer provided health insurance premiums and therefore tax expenditures and more importantly to show the distributional effects of each of these programs