To gain knowledge on capital investment decisions of firms, while taking into account the effects of time, uncertainty, and competition.
All non-CentER students should ask formal permission from the Director of Graduate Studies in Economics BEFORE the start of the course.
Please send your request for permission including grade list, CV and motivation letter to CentER Graduate School at email@example.com. Note that asking permission is not just a formality.
A solid background in micro-economics, such as Micro-economics 1, 2 and 3 in the CentER Research Master Economics year 1 program
After an introduction in the topic, we continue treating stochastic processes and dynamic programming. In particular we talk about Brownian motion, Poisson process, Ito's lemma, the Bellman equation in continuous time, optimal stopping, value matching, and smooth pasting. Based on this material we analyze the basic real option model, which is a single decision maker problem. This is followed by treating the problem of making capital investment decisions in an oligopoly framework. This topic requires a merger between game theory and real options. For the final assignment one has to study and extend one of the papers on strategic real options theory that has recently appeared in the literature.
Type of instructions
Type of exams
A final assignment
- A.K. Dixit and R.S. Pindyck, Investment under Uncertainty, Princeton University Press, second printing 1996.
- P.M. Kort, Real Options Basic Theory, 2018.
- P.M. Kort, Real Options Capacity Optimization, 2018.