Information acquisition and strategic investment timing

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Abstract:

We model the investigation of a nonrival investment opportunity by two firms.  Firms may expend costly effort over time to study the investment and stochastically uncover signals about its quality.  Each firm can acquire at most one signal, and signals are conditionally independent across firms.  Effort is privately exerted and signals are privately observed, but the history of investments is public.  We characterize the set of perfect Bayesian equilibria of this game, and show that in equilibrium firms may acquire a signal but delay investing even when the investment has positive expected returns.  Further, equilibria exhibiting this ``wait and see'' behavior may improve aggregate welfare or even Pareto-dominate equilibria which don't.  The structure of these equilibria is consistent with stylized facts from venture capital markets - both in our model and in reality, investors may segregate into ``leaders'', who drive interest in a deal and commit first, and ``followers'', who play a more passive role