An Unfair Option Game: The Effects of Asymmetric Government Subsidy to Innovators and Imitators

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.