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Uncertainty and the Cost of Reversal

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  • Giovanni Immordino

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Abstract

For standard irreversibility theory the prospect of acquiring better information in the future should induce more flexible decisions: the “irreversibility effect”. This result relies on the definition of an irreversible position as one that would be technically or economically impossible to reverse. In practice, many positions can be reversed at an affordable cost. In this case an increase in informativeness alone is not enough to bias decisions in favour of more flexibility. We look for restrictions on decision sets, information structures and preferences that make possible to study the effect of information on flexibility. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s10713-005-4674-3
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Bibliographic Info

Article provided by Springer in its journal THE GENEVA RISK AND INSURANCE REVIEW.

Volume (Year): 30 (2005)
Issue (Month): 2 (December)
Pages: 119-128

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Handle: RePEc:kap:geneva:v:30:y:2005:i:2:p:119-128

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Web page: http://www.springerlink.com/link.asp?id=102897

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Keywords: irreversibility; information structures;

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  1. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
  2. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
  3. Green, Jerry R. & Stokey, Nancy L., 2007. "A two-person game of information transmission," Journal of Economic Theory, Elsevier, vol. 135(1), pages 90-104, July.
  4. Gollier & Jullien & Treich, 2000. "Scientific progress and irreversibility : an economic interpretation of the Precautionary principle," Working Papers 156240, Institut National de la Recherche Agronomique, France.
  5. Singh, Nirvikar, 1991. "Posterior-preserving information improvements and principal-agent relationships," Journal of Economic Theory, Elsevier, vol. 55(1), pages 192-202, October.
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