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Investment Uncertainty, and Production Games

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  • Sjur Didrik Flåm
  • Yuri Ermoliev

Abstract

This paper explores some cooperative aspects of investments in uncertain, real options. Key production factors are assumed transferable. They may reflect property or user rights. Emission of pollutants and harvest of renewable resources are cases in point. Of particular interest are alternative projects or technologies that provide inferior but anti-correlated returns. Any such project stabilizes the aggregate proceeds. Therefore, given widespread risk exposure and aversion, that project’s worth may embody an extra bonus. The setting is formalized as a stochastic production game. Granted no economies of scale such games are quite tractable in analysis, computation, and realization. A core imputation comes in terms of contingent shadow prices that equilibrate competitive, endogenous markets. The said prices emerge as optimal dual solutions to coordinated production programs, featuring pooled resources - and also via adaptive procedures. Extra value - or an insurance premium - adds to any project whose yield is negatively associated with the aggregate.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1191.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1191

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Keywords: investment; risk attitudes; insurance; covariance-pricing; cooperative games; core; stochastic optimization;

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  1. Ermoliev, Yu. & Keyzer, M. A. & Norkin, V., 2000. "Global convergence of the stochastic tatonnement process," Journal of Mathematical Economics, Elsevier, vol. 34(2), pages 173-190, October.
  2. Dixit, Avinash & Pindyck, Robert S & Sodal, Sigbjorn, 1999. "A Markup Interpretation of Optimal Investment Rules," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(455), pages 179-89, April.
  3. Evstigneev, I.V. & Flam, S.D., 2000. "Sharing Nonconvex Costs," Norway; Department of Economics, University of Bergen, Department of Economics, University of Bergen 1300, Department of Economics, University of Bergen.
  4. Kolstad, Charles D. & Guzman, Rolando M., 1999. "Information and the Divergence between Willingness to Accept and Willingness to Pay," Journal of Environmental Economics and Management, Elsevier, vol. 38(1), pages 66-80, July.
  5. Shapley, Lloyd S. & Shubik, Martin, 1969. "On market games," Journal of Economic Theory, Elsevier, Elsevier, vol. 1(1), pages 9-25, June.
  6. Ermoliev, Yuri & Klaassen, Ger & Nentjes, Andries, 1996. "Adaptive Cost-Effective Ambient Charges under Incomplete Information," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 37-48, July.
  7. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, American Economic Association, vol. 60(3), pages 364-78, June.
  8. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, American Economic Association, vol. 64(6), pages 1006-12, December.
  9. Y. Ermoliev & M. Michalevich & A. Nentjes, 2000. "Markets for Tradeable Emission and Ambient Permits: A Dynamic Approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 15(1), pages 39-56, January.
  10. Evstigneev, I.V. & Flam, S.D., 2000. "Stochastic Programming: Non-Anticipativity and Lagrange Multipliers," Norway; Department of Economics, University of Bergen, Department of Economics, University of Bergen 1100, Department of Economics, University of Bergen.
  11. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, Elsevier, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
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Cited by:
  1. Didrik Flåm, Sjur, 2012. "Coupled projects, core imputations, and the CAPM," Journal of Mathematical Economics, Elsevier, vol. 48(3), pages 170-176.

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