IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v285y2020i1p120-132.html
   My bibliography  Save this article

Optimal investment decision under switching regimes of subsidy support

Author

Listed:
  • Oliveira, Carlos
  • Perkowski, Nicolas

Abstract

We address the problem of making a managerial decision when the investment project is subsidized, which results in the resolution of an infinite-horizon optimal stopping problem of a switching diffusion driven by either a homogeneous or an inhomogeneous continuous-time Markov chain. We provide a characterization of the value function (and optimal strategy) of the optimal stopping problem. On the one hand, broadly, we can prove that the value function is the unique viscosity solution to a system of HJB equations. On the other hand, when the Markov chain is homogeneous and the switching diffusion is one-dimensional, we obtain stronger results: the value function is the difference between two convex functions.

Suggested Citation

  • Oliveira, Carlos & Perkowski, Nicolas, 2020. "Optimal investment decision under switching regimes of subsidy support," European Journal of Operational Research, Elsevier, vol. 285(1), pages 120-132.
  • Handle: RePEc:eee:ejores:v:285:y:2020:i:1:p:120-132
    DOI: 10.1016/j.ejor.2019.02.019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S037722171930147X
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ejor.2019.02.019?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. ,, 1998. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 14(5), pages 687-698, October.
    2. Shao, Lulu & Yang, Jun & Zhang, Min, 2017. "Subsidy scheme or price discount scheme? Mass adoption of electric vehicles under different market structures," European Journal of Operational Research, Elsevier, vol. 262(3), pages 1181-1195.
    3. Kitzing, Lena & Juul, Nina & Drud, Michael & Boomsma, Trine Krogh, 2017. "A real options approach to analyse wind energy investments under different support schemes," Applied Energy, Elsevier, vol. 188(C), pages 83-96.
    4. ,, 1998. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 14(3), pages 381-386, June.
    5. ,, 1998. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 14(4), pages 525-537, August.
    6. ,, 1998. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 14(2), pages 285-292, April.
    7. Michail Chronopoulos & Verena Hagspiel & Stein-Erik Fleten, 2017. "Stepwise investment and capacity sizing under uncertainty," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 39(2), pages 447-472, March.
    8. ,, 1998. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 14(1), pages 151-159, February.
    9. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    10. Guerra, Manuel & Kort, Peter & Nunes, Cláudia & Oliveira, Carlos, 2018. "Hysteresis due to irreversible exit: Addressing the option to mothball," Journal of Economic Dynamics and Control, Elsevier, vol. 92(C), pages 69-83.
    11. Boomsma, Trine Krogh & Meade, Nigel & Fleten, Stein-Erik, 2012. "Renewable energy investments under different support schemes: A real options approach," European Journal of Operational Research, Elsevier, vol. 220(1), pages 225-237.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Mingyang & Jin, Man & Kumbhakar, Subal C., 2022. "Do subsidies increase firm productivity? Evidence from Chinese manufacturing enterprises," European Journal of Operational Research, Elsevier, vol. 303(1), pages 388-400.
    2. Gaïgi, M’hamed & Ly Vath, Vathana & Scotti, Simone, 2022. "Optimal harvesting under marine reserves and uncertain environment," European Journal of Operational Research, Elsevier, vol. 301(3), pages 1181-1194.
    3. D'Auria, Bernardo & Salmerón Garrido, José Antonio, 2022. "An anticipative Markov modulated market," DES - Working Papers. Statistics and Econometrics. WS 34083, Universidad Carlos III de Madrid. Departamento de Estadística.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luis H. R. Alvarez & Teppo A. Rakkolainen, 2006. "A Class of Solvable Optimal Stopping Problems of Spectrally Negative Jump Diffusions," Discussion Papers 9, Aboa Centre for Economics.
    2. Luis H. R. Alvarez & Erkki Koskela, 2002. "Irreversible Investment under Interest Rate Variability: New Results," CESifo Working Paper Series 640, CESifo.
    3. Luis H. R. Alvarez & Erkki Koskela, 2006. "Irreversible Investment under Interest Rate Variability: Some Generalizations," The Journal of Business, University of Chicago Press, vol. 79(2), pages 623-644, March.
    4. Ke, T. Tony & Villas-Boas, J. Miguel, 2019. "Optimal learning before choice," Journal of Economic Theory, Elsevier, vol. 180(C), pages 383-437.
    5. Dean Paxson, 2007. "Sequential American Exchange Property Options," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 135-157, January.
    6. Allen C. Goodman & Miron Stano, 2000. "Hmos and Health Externalities: A Local Public Good Perspective," Public Finance Review, , vol. 28(3), pages 247-269, May.
    7. Bettina Campedelli & Andrea Guerrina & Giulia Romano & Chiara Leardini, 2014. "La performance della rete ospedaliera pubblica della regione Veneto. L?impatto delle variabili ambientali e operative sull?efficienza," MECOSAN, FrancoAngeli Editore, vol. 2014(92), pages 119-142.
    8. Penn Loh & Zoë Ackerman & Joceline Fidalgo & Rebecca Tumposky, 2022. "Co-Education/Co-Research Partnership: A Critical Approach to Co-Learning between Dudley Street Neighborhood Initiative and Tufts University," Social Sciences, MDPI, vol. 11(2), pages 1-17, February.
    9. O'Brien, Raymond & Patacchini, Eleonora, 2003. "Testing the exogeneity assumption in panel data models with "non classical" disturbances," Discussion Paper Series In Economics And Econometrics 0302, Economics Division, School of Social Sciences, University of Southampton.
    10. YongSeog Kim & W. Nick Street & Gary J. Russell & Filippo Menczer, 2005. "Customer Targeting: A Neural Network Approach Guided by Genetic Algorithms," Management Science, INFORMS, vol. 51(2), pages 264-276, February.
    11. Yanling Li & Zita Oravecz & Shuai Zhou & Yosef Bodovski & Ian J. Barnett & Guangqing Chi & Yuan Zhou & Naomi P. Friedman & Scott I. Vrieze & Sy-Miin Chow, 2022. "Bayesian Forecasting with a Regime-Switching Zero-Inflated Multilevel Poisson Regression Model: An Application to Adolescent Alcohol Use with Spatial Covariates," Psychometrika, Springer;The Psychometric Society, vol. 87(2), pages 376-402, June.
    12. Oscar J. Cacho & Robyn L. Hean & Russell M. Wise, 2003. "Carbon‐accounting methods and reforestation incentives," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 47(2), pages 153-179, June.
    13. Walter M. Cadette, 1999. "Financing Long-Term Care: Options for Policy," Economics Working Paper Archive wp_283, Levy Economics Institute.
    14. Eggli, Yves & Halfon, Patricia & Chikhi, Mehdi & Bandi, Till, 2006. "Ambulatory healthcare information system: A conceptual framework," Health Policy, Elsevier, vol. 78(1), pages 26-38, August.
    15. M. A. Noor & E.A. Al-Said, 2002. "Finite-Difference Method for a System of Third-Order Boundary-Value Problems," Journal of Optimization Theory and Applications, Springer, vol. 112(3), pages 627-637, March.
    16. Yong He & Zhiyi Tan, 2002. "Ordinal On-Line Scheduling for Maximizing the Minimum Machine Completion Time," Journal of Combinatorial Optimization, Springer, vol. 6(2), pages 199-206, June.
    17. Henderson, James E. & Dunn, Michael A., 2007. "Investigating the Potential of Fee-Based Recreation on Private Lands in the Lower Mississippi River Delta," 2007 Annual Meeting, February 4-7, 2007, Mobile, Alabama 34822, Southern Agricultural Economics Association.
    18. Eike Quilling & Birgit Babitsch & Kevin Dadaczynski & Stefanie Kruse & Maja Kuchler & Heike Köckler & Janna Leimann & Ulla Walter & Christina Plantz, 2020. "Municipal Health Promotion as Part of Urban Health: A Policy Framework for Action," Sustainability, MDPI, vol. 12(16), pages 1-10, August.
    19. Haeringer, Guillaume & Klijn, Flip, 2009. "Constrained school choice," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1921-1947, September.
    20. Alireza Nili & Mary Tate & David Johnstone, 2019. "The process of solving problems with self-service technologies: a study from the user’s perspective," Electronic Commerce Research, Springer, vol. 19(2), pages 373-407, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:285:y:2020:i:1:p:120-132. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.