Abstract
Aim of this paper is to analyse the equilibrium strategies of two de- velopers in the real estate market, when demands are asymmetric. In particular, we are able to consider three key features of the real estate market. First, the cost of redevelop a building is, at least partially, irre- versible. Second, the rent levels for dierent building vary stochastically over time. Third, demand functions for space are interrelated and may produce positive or negative externalities. Using the method of option pricing theory, we address this issue at three levels. First, we model the investment decision of a …rm as a pre-assigned leader as a dynamic sto- chastic game. Then, we solve for the non-cooperative (decentralised) case, and for the perfectly cooperative case, in which redevelopment of an area is coordinated between …rms. Finally, we analyse the e¢ ciency/ine¢ ciency of the equilibria of the game. We …nd that if one …rm has a signi…cantly large comparative advantage, the pre-emptive threat from the rival will be negligible. In this case, short burst and overbuilding phenomena as predicted by Grenadier (1996) will occur only as a limiting case. Acknowledgement We would like to thank Giuseppe Colangelo, Gio- vanni Marseguerra and PierCarlo Nicola for many helpful discussions and suggestions. The usual disclaimer applies. This paper has been realised within the research program Modelli non lineari in economia e …nanza: dinamiche complesse, disequilibrio, interazioni strategiche. Financial sup- port from Ministero dell'Universita e della Ricerca Scienti…ca e Tecnologica is gratefully acknowledged.
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