Working Paper: CEPR ID: DP3013
Authors: Robin Mason; Helen Weeds
Abstract: This Paper examines irreversible investment in a project with uncertain returns, when there is an advantage to being the first to invest, and externalities to investing when others also do so. Pre-emption decreases and may even eliminate the option values created by irreversibility and uncertainty. Externalities introduce inefficiencies in investment decisions. Pre-emption and externalities combined can actually hasten, rather than delay, investment, contrary to the usual outcome. These facts demonstrate the importance of extending ?real options? analysis to include strategic interactions.
Keywords: network effects; preemption; real options
JEL Codes: C73; D81; L13; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Preemption (Y60) | Option Values (Y10) |
| Investment Externalities (D62) | Inefficiencies in Decision-Making (D91) |
| Preemption and Externalities (D62) | Investment Timing (G11) |
| Leader's Decision to Invest Early (G11) | Option Values (Y10) |
| Agent's Investment Decision (G11) | Returns of Another Agent (L85) |