The Effects of Information on Strategic Investment and Welfare

A model is considered where two firms compete in investing in a risky project. At certain points in time the firms obtain imperfect information about the profitability of the project. We impose that investing first can be beneficial because a Stackelberg advantage, and thus a higher market share, is obtained. On the other hand, investing as second implies that one can benefit from an information spillover generated by the investment of the other firm. Consequently, in equilibrium there is either a preemption situation or a war of attrition. In case no investment takes place during the war of attrition, this war of attrition can turn into a preemption situation. One counterintuitive result is that welfare can be negatively affected by signals becoming more informative or by occuring more frequently. Furthermore, simulations indicate that duopoly leads to higher welfare than monopoly when signals are less informative, wheras the opposite holds if there is more or better information.