Irreversible investment, uncertainty, and ambiguity: the case of bioenergy sector
AbstractWe analyse the decision of an agent to invest and engage in industrial activities that are characterized by two forms of uncertainty: market size uncertainty and competitive effect uncertainty. We apply our model on the bioenergy industries. We compare the case of an ambiguity neutral agent with that of an ambiguity adverse 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 market size uncertainty and competitive effect uncertainty.
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Bibliographic InfoPaper provided by Chaire Economie du Climat in its series Working Papers with number 1104.
Length: 26 pages
Date of creation: Apr 2011
Date of revision:
Ambiguity; Bioenergy; Irreversible investment; Uncertainty;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
- Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
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