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The Value of Fighting Irreversible Demise by Softening the Irreversible Cost

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  • Magis, P.
  • Sbuelz, A.

    (Tilburg University, Center for Economic Research)

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    Abstract

    We study a novel issue in the real-options-based technology innovation literature by means of double barrier contingent claims analysis.We show how much a ¯rm with the monopoly over a project is willing to spend in investment technology innovation that softens the irreversible cost of accessing the project before its irreversible demise.The answer depends on the project's characteristics and on the e®ectiveness demanded from technology innovation.

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    Bibliographic Info

    Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2005-26.

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    Date of creation: 2005
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    Handle: RePEc:dgr:kubcen:200526

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    Web page: http://center.uvt.nl

    Related research

    Keywords: Double barrier options; cost irreversibility; demise irreversibility; technology innovation;

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    1. Minh Ha-Duong & Benoit Morel, 2003. "The real option with an absorbing barrier," Post-Print halshs-00003976, HAL.
    2. Grenadier, Steven R. & Weiss, Allen M., 1997. "Investment in technological innovations: An option pricing approach," Journal of Financial Economics, Elsevier, vol. 44(3), pages 397-416, June.
    3. Hélyette Geman & Marc Yor, 1996. "Pricing And Hedging Double-Barrier Options: A Probabilistic Approach," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 365-378.
    4. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
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