Optimal timing of real estate development - A real options and game theoretical framework

Abstract

This study is trying to apply the real options theory in real estate development, as real estate investment is irreversible and heterogeneous. This study extends the existing literature in the following directions: (i) a monopoly real options model is proposed to examine the optimal timing and intensity simultaneously; (ii) the symmetric duopoly model is extended to asymmetric duopoly games; (iii) the incomplete information is incorporated in examine the asymmetric modela?|The Monopolistic model shows that the uncertain exogenous economic shock and the demand factors contribute to the option value of real estate development. In the asymmetric model, the sub-game perfect Nash equilibrium is derived under different levels of comparative advantage for two different developers. In the incomplete information model, a set of Bayesian Nash equilibrium is derived based on the results obtained in asymmetric duopoly model.