Preemptive Capacity Investment Under Uncertainty

The incentive to 'overinvest' in capital may be eroded in dynamic, competitive settings if firms face uncertainty and irreversibility. In this paper, we derive the stationary Markov perfect equilibrium for a dynamic, infinite-horizon capacity investment game formulated in continuous time in which reduced-form profits are subject to industry shocks. We show that the theory of marginal Tobin's q still holds in capital-accumulation games under uncertainty if the strategic externalities of rivals' investment are properly accounted for