Learning and payoff externalities in an investment game

This paper examines the interplay of informational and payoff externalities in a two-player irreversible investment game. Each player learns about the quality of his project by observing a private signal and the action of his opponent. I characterize the unique symmetric equilibrium in a timing game...

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Bibliographic Details
Published in:Games and economic behavior 2020-01, Vol.119, p.234-250
Main Author: Margaria, Chiara
Format: Article
Language:English
Subjects:
Irreversible investment
Payoff externalities
Real option
War of attrition
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Summary:This paper examines the interplay of informational and payoff externalities in a two-player irreversible investment game. Each player learns about the quality of his project by observing a private signal and the action of his opponent. I characterize the unique symmetric equilibrium in a timing game that features a second-mover advantage, allowing for arbitrary correlation in project qualities. Despite private learning, the game reduces to a stochastic war of attrition. In contrast to the case of purely informational externalities, all investments happen at the same real time instant—irrespective of the sign of the correlation—and beliefs never get trapped in a no-learning region, provided that the second-mover advantage is sufficiently high.
ISSN:0899-8256
1090-2473
DOI:10.1016/j.geb.2019.11.006