An Unfair Option Game: The Effects of Asymmetric Government Subsidy to Innovators and Imitators
Congcong Wang 1
Yan Fang 1
Rongda Chen 1  
More details
Hide details
School of Finance, Zhejiang University of Finance & Economics, Hangzhou, CHINA
Online publish date: 2017-11-21
Publish date: 2017-11-21
EURASIA J. Math., Sci Tech. Ed 2017;13(12):7845–7863
This article belongs to the special issue "Problems of Application Analysis in Knowledge Management and Science-Mathematics-Education".
This article develops a model of real option game to analyze effect of asymmetric government subsidy on the investment thresholds of private investors who compete with each other in the same market with uncertain price. The optimal investment thresholds of innovator and imitator are derived, and the effects of some key variables, such as inflation rate, interest rate, and degree of intellectual property protection, on those thresholds were analyzed. With the help of our model and a numerical example of sewage treatment industry, we demonstrate that subsidy to both innovator and imitator reduces optimal investment thresholds, while subsidy only to innovator raises the investment thresholds rather than reducing them. Based on the results of our study, we suggest that the government should offer subsidy to both of innovator and imitator indiscriminately, raise the overall level of IP protection, and reduce the financial cost for private investors in order to motivate them to invest in PPP projects.
Carbonara, N., Costantino, N., & Pellegrino, R. (2014). Concession period for PPPs: A win-win model for a fair risk sharing. International Journal of Project Management, 32(7), 1223-1232.
Cerqueti, R., Tramontana, F., & Ventura, M. (2015). On the coexistence of innovators and imitators. Technological Forecasting & Social Change, 90, 487-496.
Chen, R. D., Wang, Z., & Yu, L. A. (2017). Importance Sampling for Credit Portfolio Risk with Risk Factors Having t-Copula. International Journal of Information Technology & Decision Making, 16(4), 1101–1124.
Choi, J. H., Chung, J., & Lee, D. J. (2010). Risk perception analysis: Participation in China’s water PPP market. International Journal of Project Management, 28(6), 580-592.
Dixit, A., & Pindyck, R. (1994). Investment Under Uncertainty. Princeton, NJ: Princeton University Press.
Grenadier, S. R. (1996). The strategic exercise of option: development cascades and overbuilding in real estate markets. The Journal of Finance, 51(5), 1653-1679.
Kurniawan, F., Mudjanarko, S. W., & Ogunlana, S. (2015). Best practice for financial models of PPP projects. Procedia Engineering, 125, 124-132.
Martzoukos, S. H., & Zacharias, E. (2008). Real option games with R&D and learning spillovers. Omega, 41(2), 236-249.
Pawlina, G., & Kort, P. M. (2006). Real options in an asymmetric duopoly: who benefits from your competitive disadvantage? Journal of Economics and Management Strategy, 15(1), 1-35.
Pei, S.-Y. (2008). Treatment cost of sewage treatment plant. Environment Engineering, 26, 55-57.
Scandizzo, P. L., & Ventura, M. (2016). Innovation and imitation as an interactive process. Economics of Innovation and New Technology, 25(8), 821-851.
Smets, F. R. (1991). Exporting versus FDI: the effect of uncertainty, irreversibility and strategic interactions. Working Paper, Yale University, New Haven, USA.
Suttinon, P., Bhatti, A. M., & Nasu, S. (2012). Option games in water infrastructure investment. Journal of Water Resource Planning and Management, 138(3), 268-276.
Wang, Y. P. (2016). A Study on Kinmen Resident’s Perception of Tourism Development and Culture Heritage Impact. Eurasia Journal of Mathematics, Science & Technology Education, 12(12).
You, D., Yang, X., Wu, D.-D., & Chen, G. (2014). Option game with Poisson jump process in company radical technological innovation. Technological Forecasting and Social Change, 81(1), 341-350.
Zhu, W., Zhu, Z., Fang, S., & Pan, W. (2017). Chinese Students’ Awareness of Relationship between Green Finance, Environmental Protection Education and Real Situation. Eurasia Journal of Mathematics, Science & Technology Education, 13(7), 3753-3769.