Asymmetric Information in a Capital Accumulation Differential Game with Spillover and Learning Effects

Abstract

This paper considers a capital accumulation game where the installation costs of investments are lowered by the firm’s own capital stock because of learning and by the competitor’s capital stock because of spillover effects. To properly understand the impact of the two capital stocks, we consider six information structures which differ in whether a firm takes into account that their competitor’s strategy depends only on time or on one or both capital stocks. We find that if firms are aware that their own capital stock makes investments of the competitor more efficient, a firm would invest less. Due to this effect, information only pays off if it is taken into account by both competitors, because otherwise the less informed and therefore less cautious player invests more and has a higher capital stock and revenues in the long run.