Premium
Overbuilding: A Game‐Theoretic Approach
Author(s) -
Wang Ko,
Zhou Yuqing
Publication year - 2000
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00810
Subject(s) - investment (military) , economics , renting , space (punctuation) , microeconomics , supply and demand , face (sociological concept) , industrial organization , computer science , politics , engineering , social science , civil engineering , sociology , political science , law , operating system
The persistence of excess vacancy has long been documented in the literature. We propose that, because vacant land does not produce income, there is a tendency for developers to build whenever they can identify a development opportunity. Since developers have to compete with each other for the development opportunity, in the aggregate, developers will supply more units than the demand in the market. In the face of an oversupply, we show that, under certain circumstances, developers will not lower the rental rate to eliminate vacancy space. Our model also has implications for investment decisions dealing with projects that could take advantage of existing but not fully utilized assets.