Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

Author Info

  • Elodie Le Cadre
  • Caroline Orset
Registered author(s):

    Abstract

    We analyse the decision of an agent to invest in industrial activities characterized by two forms of uncertainty: market size uncertainty and price uncertainty. We use bioenergy industries for an application of the model. Indeed, the sector is confronted to both, an uncertainty in relation to the arrival of an activity relying on the implementation of emerging renewable energy technology (second generation biofuel process) and an uncertainty linked to the variability of the price of biomass sold. We find the neglecting market size-related uncertainty would lead to an underestimation of the role of price uncertainty on the investment. Likewise, adding a price uncertainty may increase the investment when under both uncertainties the producer over values the selling prices. We demonstrate that the investment under price uncertainty is larger than the one under market size uncertainty when the producer's prior belief on the realization of the situation with a high price is higher than certain threshold. In addition, the ambiguity aversion on the price distribution also leads the producer to under-invest. We then discuss some political instruments that could ease the ability of the producer to invest in context of uncertainty and ambiguity.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: https://www6.versailles-grignon.inra.fr/economie_publique/Media/fichiers/Working-Papers/Working-Papers-2010/WP_2010_03
    Download Restriction: no

    Bibliographic Info

    Paper provided by INRA, Economie Publique in its series Working Papers with number 2010/03.

    as in new window
    Length:
    Date of creation: 01 Mar 2010
    Date of revision:
    Handle: RePEc:apu:wpaper:2010/03

    Contact details of provider:
    Postal: BP 01, 78850 Thiverval Grignon
    Phone: 01 30 81 53 30
    Fax: 01 30 81 53 68
    Email:
    Web page: http://www4.versailles-grignon.inra.fr/economie_publique_eng
    More information through EDIRC

    Related research

    Keywords: Ambiguity; Bioenergy; Irreversible investment; Real options theory; Uncertainty;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Dangl, Thomas, 1999. "Investment and capacity choice under uncertain demand," European Journal of Operational Research, Elsevier, vol. 117(3), pages 415-428, September.
    2. Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, vol. 70(4), pages 1403-1443, July.
    3. Heath, Chip & Tversky, Amos, 1991. " Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
    4. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2002. "A smooth model of decision making under ambiguity," ICER Working Papers - Applied Mathematics Series 11-2003, ICER - International Centre for Economic Research, revised Apr 2003.
    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. Kahn, Barbara E & Sarin, Rakesh K, 1988. " Modeling Ambiguity in Decisions under Uncertainty," Journal of Consumer Research, University of Chicago Press, vol. 15(2), pages 265-72, September.
    7. Engle Warnick James C. & Escobal Javier & Laszlo Sonia C., 2011. "Ambiguity Aversion and Portfolio Choice in Small-Scale Peruvian Farming," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-56, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:apu:wpaper:2010/03. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Régis Grateau).

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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