Investment Dynamics: Good News Principle

The authors study a dynamic Cournot game with capacity accumulation under demand uncertainty, in which the investment is perfectly divisible, irreversible, and productive with a lag. They characterize equilibrium investments under closed-loop and S-adapted open-loop information structures. Contrary to what is established usually in the dynamic games literature with deterministic demand, they find that the firms may invest at a higher level in the open-loop equilibrium (which in some cases coincides with Markov perfect equilibrium) than in the closed-loop Nash equilibrium. The rankings of the investment levels obtained in the two equilibria actually depend on the initial capacities and on the degree of asymmetry between the firms.

Provided by: University of Guelph Topic: Software Date Added: Feb 2010 Format: PDF

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