Smart City Investments under Dynamic Information Acquisition

57 Pages Posted: 17 Mar 2018 Last revised: 25 Jun 2020

See all articles by Jussi Keppo

Jussi Keppo

National University of Singapore - NUS Business School

Hong Ming Tan

National University of Singapore (NUS) - NUS Business School

Chao Zhou

National University of Singapore (NUS) - Department of Mathematics

Date Written: June 23, 2020

Abstract

Central and local governments around the world are seeking investments from private firms to
create smart city solutions. Motivated by this, we model an investor and a local government
with a Stackelberg game. The investor has a CARA (or exponential) utility function and she has
an option to acquire data dynamically and use that in a Bayesian predictive model to forecast
the quality sensitivity of demand before her investment decision. The government chooses the
highest price such that demand quantity is above a minimum threshold. We prove comparative
statics under the dynamic information acquisition and the Stackelberg game. We show that
borrowing-constrained or highly risk-averse investors have low demand for information. Fur-
thermore, the falling marginal cost of information driven by smart cities’ datasets and analytics
raises investment amounts and leverage, which leads to higher losses during crises. Finally, we
show that leverage constraints are effective in mitigating losses during crises.

Keywords: information, analytics, investment, leverage, smart city

JEL Classification: D81, D83, G11

Suggested Citation

Keppo, Jussi and Tan, Hong Ming and Zhou, Chao, Smart City Investments under Dynamic Information Acquisition (June 23, 2020). Available at SSRN: https://ssrn.com/abstract=3141043 or http://dx.doi.org/10.2139/ssrn.3141043

Jussi Keppo (Contact Author)

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Hong Ming Tan

National University of Singapore (NUS) - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Chao Zhou

National University of Singapore (NUS) - Department of Mathematics ( email )

Department of Mathematics
Singapore, 117543
Singapore

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