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Finite Project Life and Uncertainty Effects on Investment

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  • Gryglewicz, S.
  • Huisman, K.J.M.
  • Kort, P.M.

    (Tilburg University, Center for Economic Research)

Abstract

This paper revisits the important result of the real options approach to investment under uncertainty, which states that increased uncertainty raises the value of waiting and thus decelerates investment.Typically in this literature projects are assumed to be perpetual.However, in today.s economy .rms face a fast-changing technology environment, implying that investment projects are usually considered to have a .nite life.The present paper studies investment projects with .nite project life, and we .nd that, in contrast with the existing theory, investments may be accelerated by increased uncertainty.It is shown that this particularly happens when uncertainty is limited and project life is short.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2006-124.

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Date of creation: 2006
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Handle: RePEc:dgr:kubcen:2006124

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Keywords: investment; uncertainty; finite project length;

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References

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Citations

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Cited by:
  1. Shibata, Takashi, 2009. "Investment timing, asymmetric information, and audit structure: A real options framework," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 903-921, April.
  2. Elmar Lukas & Andreas Welling, 2012. "On the Investment-Uncertainty Relationship: A Game Theoretic Real Option Approach," FEMM Working Papers 120030, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  3. Ni, Shawn & Ratti, Ronald A., 2009. "Heterogeneous Parameter Uncertainty and the Timing of Investment during Crisis," Economics Discussion Papers 2009-12, Kiel Institute for the World Economy.
  4. Markus Diller, 2012. "Tax-Optimal Step-Up and Imperfect Loss Offset," BuR - Business Research, German Academic Association for Business Research, vol. 5(1), pages 8-23, May.
  5. Lukas, Elmar & Welling, Andreas, 2014. "On the investment–uncertainty relationship: A game theoretic real option approach," Finance Research Letters, Elsevier, vol. 11(1), pages 25-35.
  6. Dandan Song & Zhaojun Yang, 2014. "Utility-Based Pricing, Timing and Hedging of an American Call Option Under an Incomplete Market with Partial Information," Computational Economics, Society for Computational Economics, vol. 44(1), pages 1-26, June.
  7. Djembissi, Bertrand, 2011. "Excessive risk taking and the maturity structure of debt," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1800-1816, October.
  8. Shibata, Takashi & Nishihara, Michi, 2010. "Dynamic investment and capital structure under manager-shareholder conflict," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 158-178, February.
  9. Thijssen, Jacco J.J., 2011. "Incomplete markets, ambiguity, and irreversible investment," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 909-921, June.

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