Preemptive Capacity Investment Under Uncertainty

18 Pages Posted: 23 Jan 2011 Last revised: 24 Jun 2012

See all articles by Benoit Chevalier-Roignant

Benoit Chevalier-Roignant

Cranfield School of Management

Arnd Huchzermeier

WHU - Otto Beisheim School of Management

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration; King's College London; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: February 18, 2011

Abstract

The incentive to 'overinvest' in capital may be eroded in dynamic, competitive settings if firms face uncertainty and irreversibility. In this paper, we derive the stationary Markov perfect equilibrium for a dynamic, infinite-horizon capacity investment game formulated in continuous time in which reduced-form profits are subject to industry shocks. We show that the theory of marginal Tobin's q still holds in capital-accumulation games under uncertainty if the strategic externalities of rivals' investment are properly accounted for.

Keywords: financial economics, strategic investment under uncertainty, real options, stochastic differential games, capital accumulation

Suggested Citation

Chevalier-Roignant, Benoit and Huchzermeier, Arnd and Trigeorgis, Lenos, Preemptive Capacity Investment Under Uncertainty (February 18, 2011). Available at SSRN: https://ssrn.com/abstract=1744744 or http://dx.doi.org/10.2139/ssrn.1744744

Benoit Chevalier-Roignant (Contact Author)

Cranfield School of Management ( email )

Cranfield
Bedfordshire MK43 OAL, MK43 0AL
United Kingdom

Arnd Huchzermeier

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-261-6509380 (Phone)
+49-261-6509389 (Fax)

HOME PAGE: http://www.whu.edu/prod

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
00357 2 338762 (Phone)
00357 2 339063 (Fax)

King's College London ( email )

Strand
London, WC2R 2LS
United Kingdom

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

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