Dynamic stability of cooperative investment under uncertainty

This article models the inherent cooperative and noncooperative incentives of stakeholders in investment projects in a novel way by combining concepts from cooperative game theory and real options theory. As stakeholders have outside options, in the sense that they may terminate negotiations with the current coalition and form another, we introduce cooperative investment projects and analyze a coalitional and dynamic stability concept. We characterize the proportional investment scheme as the scheme that maximizes the total project value and that results in the earliest investment timing. A failure to implement proportional investment leads to the formation of a smaller, less efficient, coalition. We show that proportional investment is dynamically stable if all stakeholders experience synergy with respect to the coalition. In fact, we prove that dynamic stability can be present when the market is stable, and when the market is growing and volatile, even if some stakeholders experience no synergy. At the same time, our analysis indicates that proportional investment is more prone to dynamic instability in a market with high profit growth and low profit uncertainty, or vice versa.