Abstract
In “Fear of the Market or Fear of the Competitor? Ambiguity in a Real Options Game”, Tobias Hellmann and Jacco Thijssen study the effects of managerial ambiguity aversion on investment decisions in a duopoly. Ambiguity is over the investment project’s expected growth rate (the “trend”). In their continuous-time model they assume that investment commands a first-mover advantage, which, in equilibrium, leads to pre-emption. They show that ambiguity reduces pre-emptive pressure. As a consequence firm value may be increasing in the degree of ambiguity. They also find that the worst-case prior (under which managers compute firm value) is not always given by the lowest trend, but can switch over time between the lowest and the highest trend. Finally, if one of the firms is not ambiguity averse, then its value is increasing in the other firm’s degree of ambiguity.
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