Dynamic Stability of Cooperative Investment under Uncertainty

This article models the inherent cooperative and non-cooperative incentives of stakeholders in investment projects in a novel way by combining concepts from co operative game theory and real options theory. As stakeholders have outside options, in the sense that they may terminate negotiations with the current coalition and join another, we introduce and analyze a coalitional and dynamic stability concept. We show that investment projects, in which cooperation between stakeholders is necessary, are more prone to coalitional instability when there are insufficient synergies between the stakeholders. We characterize the proportional investment scheme as the investment scheme that maximizes the total project value and that results in the earliest investment timing. A failure to implement proportional investing leads to the formation of a smaller, less efficient, coalition. The vulnerability to fail is exacerbated in a market that is characterized by high profit growth and low profit uncertainty, or vice versa. Finally, we explicitly consider one-leader investment projects and characterize the prioritized investment scheme that maximizes the value of the leader. We show that the same market conditions govern the stability of the prioritized investment scheme, which contributes to the robustness of our results.