Ž . Economic Modelling 17 2000 589617 Irreversible investment with uncertainty and strategic behavior Michele Moretto  Department of Economics, Uni  ersity of Pado a, Via del Santo 22, 35 100 Pado a, Italy Accepted 24 November 1999 Abstract The paper provides a model of technology adoption in the case where adopting alone is Ž . more expensive than adopting when others have already done so network effect . In addition, if each agent gains at the expense of his rivals, he may also have an incentive for ‘preemptive adoption’. We deal with these two issues in a dynamic programing framework, where adoption is seen as a strategic switching time decision problem for agents facing an ongoing stochastic operating benefit plus sunken investment costs. The model defines the option value of investing for a continuous time stochastic game. In the case of network benefits alone, agents follow a stationary bandwagon strategy, representing the effect caused by a war of attrition. Yet, as network benefits reduce adoption costs after an agent has switched, rivals may follow suit. In the opposite case, where going first gives the innovator a higher payoff the bandwagon rule is turned over and the option value of investing first may be lower than that of going second. This gives rise to sequential adoption.  2000 Elsevier Science B.V. All rights reserved. JEL classifications: D81; C73; G13 Keywords: Waiting games; Preemption; Option values 1. Introduction Economics defines investment as the act of incurring an immediate cost in the Ž expectation of future payoff. However, when the immediate cost is sunk at least  Tel.: 39-049-8274101; fax: 39-049-827 4221. Ž . E-mail address: moretto@decon.unipd.it M. Moretto . 0264-999300$ - see front matter  2000 Elsevier Science B.V. All rights reserved. Ž . PII: S 0 2 6 4 - 9 9 9 3 99 00040-1