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Irreversible investment, uncertainty, and ambiguity: The case of bioenergy sector

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  • Jouvet, Pierre-André
  • Le Cadre, Elodie
  • Orset, Caroline

Abstract

We analyze production and investment decisions of an agent in industrial activities that are characterized by two forms of uncertainty: demand uncertainty (in terms of number of buyers) and competitive effect uncertainty (in terms of other energy resource). We apply our model on the bioenergy industries. We compare the case of an ambiguity neutral agent with that of an ambiguity averse agent. We show that the investment decision of an agent depends on the effects of both the capital investment and the level of production on the cost and the uncertainty the agent is confronted with. Moreover, we find that ambiguity aversion tends to decrease the agent's optimal levels of production and investment. Our numerical analysis of the French case illustrates the different effects associated with demand uncertainty and competitive effect uncertainty.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 1 ()
Pages: 45-53

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Handle: RePEc:eee:eneeco:v:34:y:2012:i:1:p:45-53

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Web page: http://www.elsevier.com/locate/eneco

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Keywords: Ambiguity; Bioenergy; Irreversible investment; Uncertainty;

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Cited by:
  1. Yi, Fujin & Lin, C.-Y. Cynthia & Thome, Karen, 2013. "An Analysis of the Effects of Government Subsidies and the Renewable Fuels Standard on the Fuel Ethanol Industry: A Structural Econometric Model," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150224, Agricultural and Applied Economics Association.

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