TY  - JOUR
AU  - Bulan,Laarni
AU  - Mayer,Christopher J.
AU  - Somerville,C. Tsuriel
TI  - Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12486
PY  - 2006
Y2  - August 2006
UR  - http://www.nber.org/papers/w12486
L1  - http://www.nber.org/papers/w12486.pdf
N1  - Author contact info:
Laarni Bulan
Brandeis University
International Business School
415 South Street MS 021
Waltham, MA 02454
Tel: 781-736-2294
E-Mail: lbulan@brandeis.edu

Christopher J. Mayer
Columbia Business School
3022 Broadway, Uris Hall #805
New York, NY 10027
Tel: 212/854-4221
Fax: 212-932-0545
E-Mail: cm310@columbia.edu

Tsur Somerville
Sauder School of Business
2053 Main Mall
Vancouver, BC  V6T 1Z2  CANADA
E-Mail: Tsur.Somerville@sauder.ubc.ca
AB  - We examine the extent to which uncertainty delays investment and the effect of competition on this relationship using a sample of 1,214 condominium developments in Vancouver, Canada built from 1979-1998.  We find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments.  Empirically, a one-standard deviation increase in the return volatility reduces the probability of investment by 13 percent, equivalent to a 9 percent decline in real prices.  Increases in the number of potential competitors located near a project negate the negative relationship between idiosyncratic risk and development.  These results support models in which competition erodes option values and provide clear evidence for the real options framework over alternatives such as simple risk aversion.
ER  -