Investment under uncertainty, competition and regulation

Adrien Nguyen Huu

doi:10.3934/jdg.2014.1.579

Article Contents

2014, Volume 1, Issue 4: 579-598. Doi: 10.3934/jdg.2014.1.579

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Investment under uncertainty, competition and regulation

Adrien Nguyen Huu^1,

1.
IMPA, Estrada Dona Castorina, 110, Rio De Janeiro, 22460-320

Received: August 31, 2013

Revised: January 31, 2014

Published: September 2014

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Abstract

We investigate a randomization procedure undertaken in real option games which can serve as a basic model of regulation in a duopoly model of preemptive investment. We recall the rigorous framework of M. Grasselli, V. Leclère and M. Ludkovsky (Priority Option: the value of being a leader, International Journal of Theoretical and Applied Finance, 16, 2013), and extend it to a random regulator. This model generalizes and unifies the different competitive frameworks proposed in the literature, and creates a new one similar to a Stackelberg leadership. We fully characterize strategic interactions in the several situations following from the parametrization of the regulator. Finally, we study the effect of the coordination game and uncertainty of outcome when agents are risk-averse, providing new intuitions for the standard case.

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Mathematics Subject Classification: Primary: 91B06, 91A55; Secondary: 91A80.

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