Real Option Games with Incomplete Information and Spillovers

50 Pages Posted: 20 Jan 2002

See all articles by Eleftherios Zacharias

Eleftherios Zacharias

affiliation not provided to SSRN

Spiros Martzoukos

University of Cyprus - Department of Public and Business Administration; George Washington University - School of Business

Date Written: December 2001

Abstract

We model in a game theoretic context managerial intervention directed towards value enhancement in the presence of uncertainty and spillover effects. Two firms face real investment opportunities, and before making the irreversible investment decisions, they have options to enhance value by doing more R&D and/or acquiring more information. Due to spillovers, firms act strategically by optimizing their behavior, conditional on the actions of their counterpart. They face two decisions that are solved for interdependently in a two-stage game. The first-stage decision is: what is the optimal level of coordination between them? the second-stage decision is: what is the optimal effort for a given level of the spillover effects and the cost of information acquisition? For the solution we adopt an option pricing framework that allows analytic tractability.

Keywords: Real options, Incomplete information and learning, R&D coordination, 2-stage games

JEL Classification: G13, G31, C72, L00

Suggested Citation

Zacharias, Lefteris and Martzoukos, Spiros Harilaos Spiridon, Real Option Games with Incomplete Information and Spillovers (December 2001). EFMA 2002 London Meetings; U of Cambridge, Judge Institute of Management Studies Working Paper 14/2001. Available at SSRN: https://ssrn.com/abstract=297239 or http://dx.doi.org/10.2139/ssrn.297239

Lefteris Zacharias

affiliation not provided to SSRN

Spiros Harilaos Spiridon Martzoukos (Contact Author)

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

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
357-2-892474 (Phone)
357-2-892460 (Fax)

George Washington University - School of Business

Washington, DC 20052
United States
202-994-5996 (Phone)
202-994-5014 (Fax)

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