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Irreversible investment and information acquisition under uncertainty

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  • Caroline Orset
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    Abstract

    We analyse the decision of an agent to invest in new industrial activities the con- sequences of which on people's health and the environment are initially unknown. The agent does not have the possibility of delaying her/his investment but s/he gets the opportunity to acquire information in order to reduce her/his uncertainty. We find that the agent always invests unless the cost exceeds the direct benefit, and does acquire information with a certain degree of precision. Moreover, we show that acquiring information can encourage the agent to make a larger investment. Likewise, we identify all factors that might modify the agent's decisions. We then discuss some political instruments that could make it easier for investors to both in- novate and acquire information. Finally, the impact of insurance on the investment and information acquisition decisions is also examined.

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    File URL: https://www6.versailles-grignon.inra.fr/economie_publique/Media/fichiers/Working-Papers/Working-Papers-2010/WP_2010_01
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    Bibliographic Info

    Paper provided by INRA, Economie Publique in its series Working Papers with number 2010/01.

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    Date of creation: 01 Jan 2010
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    Handle: RePEc:apu:wpaper:2010/01

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    Related research

    Keywords: Grants; Information acquisition; Innovation; Insurance; Irreversible investment; Risk; Uncertainty;

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    References

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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. Crabbe, Philippe J., 1987. "The quasi-option value of irreversible investment: A comment," Journal of Environmental Economics and Management, Elsevier, vol. 14(4), pages 384-385, December.
    4. Sinclair-Desgagne, Bernard & Gozlan, Estelle, 2003. "A theory of environmental risk disclosure," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 377-393, March.
    5. Pindyck, Robert S., 1980. "The optimal production of an exhaustible resource when price is exogenous and stochastic," Working papers 1162-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Fischer, Stanley, 1978. "Call Option Pricing when the Exercise Price Is Uncertain, and the Valuation of Index Bonds," Journal of Finance, American Finance Association, vol. 33(1), pages 169-76, March.
    7. Epstein, Larry G, 1980. "Decision Making and the Temporal Resolution of Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 269-83, June.
    8. Kevin F. McCardle, 1985. "Information Acquisition and the Adoption of New Technology," Management Science, INFORMS, vol. 31(11), pages 1372-1389, November.
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