Real options and preemption under incomplete information

This paper introduces incomplete information and preemption into an equilibrium model of firms facing real investment decisions. The optimal investment strategy may lie anywhere between the zero-NPV trigger level and the optimal strategy of a monopolist, depending on the distribution of competitors' costs and the implied fear of preemption. Our model implies that the equity returns of firms which hold real options and are subject to preemption will contain jumps,and positive skewness. (C) 2002 Elsevier Science B.V. All rights reserved.