Developing real option game models

Azevedo, Alcino; Paxson, Dean

doi:10.1016/j.ejor.2014.02.002

Cited by 104 publications

(34 citation statements)

References 72 publications

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“…On the other hand, we have the strategic real option models where competition between firms is taken into account but the size of the investment is given. The latter area is surveyed in Grenadier (2000), Huisman et al (2004), Chevalier-Roignant and Trigeorgis (2011), and Azevedo and Paxson (2014). Our article extends this line of research in that firms can optimally choose the magnitude of the investment.…”

mentioning

confidence: 70%

Strategic Capacity Investment Under Uncertainty

Huisman

Kort

2013

SSRN Journal

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This article considers investment decisions within an uncertain dynamic and duopolistic framework. Each investment decision involves to determine the timing and the capacity level.The simultaneous analysis of timing and capacity decisions extends work on entry deterrence/accommodation to consider a timing/delay element. We find that, when applying an entry deterrence policy, the first investor, or incumbent, overinvests in capacity for two reasons. First, it delays the investment of the second investor, or entrant. Second, the entrant will invest in less capacity. We also find that greater uncertainty makes entry deterrence more likely.

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confidence: 70%

Strategic Capacity Investment Under Uncertainty

Huisman

Kort

2013

SSRN Journal

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“…12 The effects of competition in anticipating the investment decisions are well established in the real options literature. Refer to Azevedo and Paxson (2014) for an extensive survey.…”

Section: The Threat Of Public Competitionmentioning

confidence: 99%

Public stimulus for private investment: An extended real options model

2016

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The recent global financial crisis and the European sovereign-debt crisis have put financial constraints on Governments limiting their capacity to increase public investment and to promote economic growth. Also, in periods of high uncertainty firms tend to postpone the implementation of their projects, which has a negative impact on the economic growth. In this paper, we study different policies that can be set by governments in order to stimulate private investment. We develop an extended real options model that takes into account some relevant macroeconomic factors (namely, different types of taxes, asymmetric investment multipliers, and public inefficiencies) that do not appear in the related literature. The optimal incentives for the different types of stimuli are derived and discussed. We show that the optimal subsidy that prompts the private investment must be subject to a maximum that accounts for the Government's incremental tax-related benefits. Additionally, the required optimal subsidy can be reduced if the Government acts as a competitor fighting for the project. This would diminish the public spending while achieving the same objectives. We also show that a subsidy policy is always better than tax reductions. Finally, we illustrate the implementation of the model with an example that applies to the Portuguese economy. JEL codes: E22; E62; G31; H32.

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“…Several authors focus on the conflict between a principal GOV and agent concessionaire GEN implicit in contracts. Chevalier-Roignant et al (2011) and Azevedo and Paxson (2014) survey many real option game problems between principal and agent. Scandizzo and Ventura (2010) focus on a baseline for a concession contract, in order to assess the balance of power between the public and the private party.…”

Section: Introductionmentioning

confidence: 99%

Real Collars as Alternative Incentives for Subsidizing Energy Facilities

Adkins

Paxson²

2018

The Manchester School

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We suggest that real collars may be acceptable incentives for encouraging development of low (or no) carbon energy generating facilities as an alternative for high feed‐in‐tariffs. We provide novel analytical solutions for real collars and partial collars, plus floor and ceiling partial derivatives. The ‘gains/losses’ of the energy generator as perceived parameter values change are compared to those of the government providing the collar, and floor or ceiling only, viewing the arrangement as a real option game between principal and agent. A volatility increase first increases, then decreases the ‘gains’ of the generator.

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Developing real option game models

Cited by 104 publications

References 72 publications

Strategic Capacity Investment Under Uncertainty

Strategic Capacity Investment Under Uncertainty

Public stimulus for private investment: An extended real options model

Real Collars as Alternative Incentives for Subsidizing Energy Facilities

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