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Investment and abandonment decisions in the presence of imperfect aggregation of information

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  • José Pablo Dapena

Abstract

The traditional marshallian rule of investing when the value of the investment is greater than its installment cost is modified in the presence of irreversibility and uncertainty, giving rise to an option component. Additionally, the interaction of participants holding each one a right to invest can give rise under imperfect information to situations of deviations from the optimal timing of exercise of the investment and to "herd behavior" or informational cascades given that the agents take into account when deciding not only their private set of information but also the information released to the market by the decisions made by the other agents. In the present paper we develop a model that tries to capture these effects and dynamics by showing revision of conditional expectations of the agents, and with considerations regarding the degree of dispersion of information in the economy and the effect of the number of participants and their effect into their behavior.

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Bibliographic Info

Paper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 362.

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Length: 21 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:cem:doctra:362

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Keywords: real options; capital markets; investment; aggregation; information;

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  1. Ellison, Glenn & Fudenberg, Drew, 1992. "Rules of Thumb for Social Learning," IDEI Working Papers 17, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  3. Caplin, A. & Leahy, J., 1992. "Business as Usual, Market Crashes and Wisdom After the Fact," Discussion Papers 1992_18, Columbia University, Department of Economics.
  4. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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