Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099923 | Journal of Economic Dynamics and Control | 2007 | 25 Pages |
Abstract
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.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Pauli Murto,