THE STRATEGIC EXERCISE OF OPTIONS - DEVELOPMENT CASCADES AND OVERBUILDING IN REAL-ESTATE MARKETS

This article develops an equilibrium framework for strategic option ex ercise games. I focus on a particular example: the timing of real esta te development. An analysis of the equilibrium exercise policies of de velopers provides insights into the forces that shape market behavior. The model isolates the factors that make some markets prone to bursts of concentrated development. The model also provides an explanation f or why some markets may experience building booms in the face of decli ning demand and property values. While such behavior is often regarded as irrational overbuilding, the model provides a rational foundation for such exercise patterns.