The effects of information on strategic investment and welfare
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The paper analyses the influence of uncertainty and competition on the strategic considerations of a firm’s investment decision, where the firm receives imperfect signals about the profitability of an investment project. We find a preemptive or an attrition equilibrium depending on a trade-off between first and second mover advantages. We show that welfare can be negatively affected by decreasing uncertainty, i.e. more and/or better information. Furthermore, simulations indicate that duopoly leads to higher welfare than monopoly if there are few and relatively non-informative signals, whereas the opposite holds if there are many and relatively informative signals.
JEL Classification Numbers:
C61, D43, D81.
- The effects of information on strategic investment and welfare
Volume 28, Issue 2 , pp 399-424
- Cover Date
- Print ISSN
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- Strategic investment
- Imperfect information
- Industry Sectors
- Author Affiliations
- 1. Department of Economics, Trinity College Dublin, Dublin 2, IRELAND
- 2. Department of Econometrics & Operations Research and CentER, Tilburg University, PO Box 90153, 5000, LE Tilburg, THE NETHERLANDS
- 3. Centre for Quantitative Methods, P.O. Box 414, 5600, AK Eindhoven, THE NETHERLANDS
- 4. Department of Economics, UFSIA, University of Antwerp, Prinsstraat 13, 2000, Antwerp 1, BELGIUM