The effects of information on strategic investment and welfare

A model is considered where two flrms compete in investing in a risky project. At certain points in time the flrms obtain imperfect information about the profltability of the project. We impose that investing flrst can be beneflcial because a Stackelberg advantage, and thus a higher market share, is obtained. On the other hand, investing as second implies that one can beneflt from an in- formation spillover generated by the investment of the other flrm. 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 afiected by signals becoming more informative or by occur- ring more frequently. Furthermore, simulations indicate that duopoly leads to higher welfare than monopoly when signals are less informative, whereas the opposite holds if there is more or better information. Keywords: Uncertainty, Strategic investment, Imperfect information, Welfare. JEL codes: C61, D43, D81. Dolf Talman is acknowledged for many inspiring discussions and meticulous proof-reading. Jan