Search

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jet.2010.10.002 Byline: Jacco J.J. Thijssen Keywords: Timing games; Preemption; Rent equalization Abstract: In this paper a two-player real option game with a first-mover advantage is analyzed, where payoffs are driven by a player-specific stochastic state variable. It is shown that there exists an equilibrium which has qualitatively different properties from those in standard real option games driven by common stochastic shocks. The properties of the equilibrium are four-fold: (i) preemption does not necessarily occur, (ii) if preemption takes place, the rent-equalization property holds, (iii) for almost all sample paths it is clear ex-ante which player invests first, and (iv) it is possible that both players invest simultaneously, even if that is not optimal. It is argued from simulations that real option games with a common one-dimensional shock do not provide a good approximation for games with player-specific uncertainty, even if these are highly correlated. Author Affiliation: Department of Economics & Related Studies, University of York, Heslington, York YO10 5DD, UK Article History: Received 10 March 2009; Revised 30 July 2010; Accepted 31 July 2010 Article Note: (footnote) [star] The author thanks Peter Spencer, Magdalena Trojanowska, and seminar participants at Tilburg University, Trinity College Dublin, the University of York and the SaA[macron]d Business School, University of Oxford for their constructive comments. Comments from an anonymous referee and the Editor (Christian Hellwig) are greatly appreciated.

The study focuses on a firm that is faced with the decision of investing in a project where, over time, the firm receives imperfect signals indicating the project's profitability. Results demonstrate that the probability of investing in a project with low profitability is larger when the firm uses a conventional rule like the net present value.

Abstract Many countries have introduced support schemes to accelerate investments in renewable energy (RE). Experience shows that, over time, retraction or revision of support schemes become more likely. Investors in RE are greatly affected by the risk of such subsidy changes. This paper examines how investment behavior is affected by updating a subjective belief on the timing of a subsidy revision, incorporating Bayesian learning into a real options modeling approach. We analyze a scenario where a retroactive downward adjustment of fixed feed-in tariffs (FIT) is expected through a regime switching model. We find that investors are less likely to invest when the arrival rate of a policy change increases. Further, investors prefer a lower FIT with a long expected lifespan. We also consider an extension where, after retraction, electricity is sold in a free market. We find that if policy uncertainty is high, an increase in the FIT will be less effective at accelerating investment. However, if policy risk is low, FIT schemes can significantly accelerate investment, even in highly volatile markets. Highlights • Examine how investment behavior is influenced by risk of subsidy changes. • Study how updating a subjective belief on timing of subsidy revision affects this. • Investors are less likely to invest when the arrival rate of a policy change increases. • Investors prefer a lower feed-in tariff (FIT) with a long expected lifespan. • If policy risk is low, FIT schemes can significantly accelerate investment. [ABSTRACT FROM AUTHOR]