Coordination and Cooperation in Investment Timing with Externalities
Etienne Billette de Villemeur
University of Lille I - EQUIPPE
Richard R Ruble
EM Lyon (Ecole de Management de Lyon)
Bruno P. A. Versaevel
EM LYON (Ecole de Management de Lyon)
October 1, 2011
GATE Working Paper No. 1128
We characterize sequential (preemption) and simultaneous (coordination) equilibria, as well as joint-value maximizing (cooperation) solutions, in a model of investment timing allowing for externalities in both flow profits and investment costs. For two ex-ante symmetric firms, either preemption or attrition occur depending on the size of the investment externality. Coordination is less likely with more discounting, as in a repeated game, and more likely with higher growth and volatility. Optimal cooperation involves either monopoly or duopoly investment, the latter being either symmetric or asymmetric. Finally, these characterizations are validated by applications to standard specifications of capacity accumulation and of R&D investment. In the former setup, coordination is likelier if installed capacities and lumpy investments are both large. With R&D input choices, if investment synergies are large, coordination and cooperation result in the same outcomes.
Number of Pages in PDF File: 32
Keywords: investment timing, real options, simultaneous equilibrium, joint value maximization, cooperation, investment externalities
JEL Classification: C73, D43, D92, L13working papers series
Date posted: November 9, 2011 ; Last revised: November 15, 2011
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