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Open-Loop Equilibria and Perfect Competition in Option Exercise Games

Kerry Back^1,2; Dirk Paulsen³

¹ Mitchell Institute · ² Texas A&M University · ³ University of Bonn

The investment boundaries defined by Grenadier (2002) for an oligopoly investment game determine equilibria in open-loop strategies. As closed-loop strategies, they are not equilibria, because any firm by investing sooner can preempt the investments of other firms and expropriate the growth options. The perfectly competitive outcome is produced by closed-loop strategies that are mutually best responses. In this equilibrium, the option to delay investment has zero value, and the simple NPV rule is followed by all firms. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

DOI

10.1093/rfs/hhp046

Volume

22 (11)

Pages

4531-4552

Language

en

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BibTeX

Sources

crossref openalex