Strategic timing of investment: Extensions of real options theory and timing games, with private information, and an empirical application to foreign market entry

Chapter 1 analyzes dynamic, strategic models of investment timing with uncertainty in the benefits of investing and large sunk costs (irreversibility) creating real option values of delaying investment for the imperfectly competitive firms. Private information concerning each firm's set-up costs for establishing the real investment project is included as an important extension of existing theoretical models. The results of this chapter verify that a strong threat of preemption can cause earlier investment with zero option value of waiting but that private informational advantages can partially restore the real option value of maximum delay for a monopolist. A stationary, Bayesian-Nash equilibrium is derived in pure strategies, under conditions of symmetric and asymmetric information between rival firms. Strategic cost advantages are shown to not necessarily be fully compromised by information disadvantages.; Chapter 2 analyzes a simpler strategic investment model with still different information structures. This approach examines the effects on real option values in investment timing decisions under uncertainty, resulting from different assumptions concerning the nature of private information. A stationary Bayesian-incentive compatible equilibrium is derived, taking greater advantage of the theoretical relationship between dynamic models of preemption games with private valuation and first-bid auctions. This approach also allows consideration of the interesting and applicable case of common valuation by firms. Theoretical results include the implication that real option values can be more readily competed away in the presence of common cost valuation by firms, relative to private cost information for firms.; In Chapter 3, I present evidence on the correlations between both industry-level and macroeconomic uncertainty, and new foreign direct investment (FDI). Empirical exploration of real option values in foreign market entry decisions is at a nascent stage so this chapter contributes new empirical evidence. Empirical results include that greater uncertainty at the industry-level may decrease the number of new foreign affiliates but that some macroeconomic indicators of uncertainty can actually have a positive correlation with new FDI.