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Mutually exclusive investment with technical uncertainty

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  • Jyh-Bang Jou
  • Tan (Charlene) Lee
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    Abstract

    A firm, which faces technical uncertainty as in Pindyck (1993) can choose between two mutually exclusive investment projects, Projects 1 and 2. The added option to exercise Project 2 makes the firm less likely to exercise Project 1. An increase in the degree of technical uncertainty, the investment rate or the investment value upon completion for Project 2 encourages the firm to exercise Project 2 by increasing the trigger level of the expected cost of Project 2. This, however, ambiguously affects the firm's incentive to exercise Project 1, as the firm would rather implement Project 1 (2) in a region where the expected cost of Project 2 is relatively high (low).

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/00036846.2010.498351
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 43 (2011)
    Issue (Month): 30 ()
    Pages: 4723-4728

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    Handle: RePEc:taf:applec:v:43:y:2011:i:30:p:4723-4728

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