Journal
JOURNAL OF ECONOMIC DYNAMICS & CONTROL
Volume 31, Issue 5, Pages 1473-1497Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.jedc.2006.05.010
Keywords
irreversible investment; technological progress; real options; optimal stopping; technology adoption
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The effects of two forms of uncertainty on the timing of irreversible investment are considered. Technological uncertainty is modeled as a Poisson arrival process that reduces the cost of investment, while revenue uncertainty is modeled as a diffusion process. Technological uncertainty has no effect on the optimal investment policy when revenue uncertainty is absent. However, when combined with revenue uncertainty, increased technological uncertainty makes investment less attractive relative to waiting. The paper also makes a more general point in clarifying the difference in how diffusion type of uncertainty and unidirectional stochastic progress affect investment timing. (C) 2006 Elsevier B.V. All rights reserved.
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