Overbuilding: A game-theoretic approach

The persistence of excess vacancy has long been documented in the literatur e. We propose that, because vacant land does not produce income, there is a tendency for developers to build whenever they can identify a development opportunity. Since developers have to compete with each other for the devel opment opportunity, in the aggregate, developers will supply more units tha n the demand in the market. In the face of an oversupply, we show that, und er certain circumstances, developers will not lower the rental rate to elim inate vacancy space. Our model also has implications for investment decisio ns dealing with projects that could take advantage of existing but not full y utilized assets.