Investment under uncertainty, competition and regulation

Abstract

We investigate a randomization procedure undertaken in real op- tion games which can serve as a basic model of regulation in a duopoly model of preemptive investment. We recall the rigorous framework of M. Grasselli, V. Leclère and M. Ludkovsky (Priority Option: the value of being a leader, Inter- national Journal of Theoretical and Applied Finance, 16, 2013), and extend it to a random regulator. This model generalizes and unifies the different com- petitive frameworks proposed in the literature, and creates a new one similar to a Stackelberg leadership. We fully characterize strategic interactions in the several situations following from the parametrization of the regulator. Finally, we study the effect of the coordination game and uncertainty of outcome when agents are risk-averse, providing new intuitions for the standard case.