Discussion Paper

No. 2018-39 | May 16, 2018
Bandwagon investment equilibrium of a preemption game

Abstract

In stochastic and competitive environments, investors face an investment dilemma because the environments provide conflicting incentives. Empirical research reports various behaviors exhibited by investors, including voluntary concurrent investments, which are called bandwagon investments. However, the current theoretical understanding is still limited in explaining under which condition the investment bandwagon effect occurs. The authors investigated the closed-loop subgame perfect equilibrium of an investment timing game that describes voluntary simultaneous investments. They showed that investors are on the investment bandwagon when the second mover’s additional profit rate exceeds a threshold value. Otherwise, investors sequentially invest. It explains the frequently observed investment herd effect. Moreover, it shows that the investment bandwagon effect does not exist for entering firms.

JEL Classification:

C73, D43, D92, L13

Assessment

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Links

Cite As

KiHyung Kim and Abhijit Deshmukh (2018). Bandwagon investment equilibrium of a preemption game. Economics Discussion Papers, No 2018-39, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-39


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