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Bayesian Learning and the Optimal Investment Decision of the Firm

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  • Tonks, Ian

Abstract

This paper is about learning. It illustrates how in a two period allocation problem with uncertainty in each period, an economic agent's decisions are influenced by the knowledge that he is able to learn about the uncertainty. The time periods are linked through the learning process of the economic agent. The problem to be analysed is that faced by a firm deciding whether or not to invest in a new technology or production process, whose returns are not known with certainty. Because of the two period environment, the firm is able to experiment with the new process in the first period, and observe the results before making another investment decision at the beginning of the second. Goven the opportunity for learning, how will this affect the decision of the firm in the first period?

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 192.

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Length: 36 pages
Date of creation: 1981
Date of revision:
Handle: RePEc:wrk:warwec:192

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Cited by:
  1. Alexander Zimper & Alexander Ludwig, 2008. "On attitude polarization under Bayesian learning with non-additive beliefs," Working Papers 104, Economic Research Southern Africa.
  2. Alexander Ludwig and Alexander Zimper, 2013. "Biased Bayesian Learning with an Application to the Risk-Free Rate Puzzle," Working Papers 390, Economic Research Southern Africa.
  3. Alexander Ludwig & Alexander Zimper, 2008. "A parsimonious model of subjective life expectancy," Working Papers 74, Economic Research Southern Africa.
  4. Alexander Zimper, 2011. "Do Bayesians learn their way out of ambiguity?," Working Papers 240, Economic Research Southern Africa.
  5. Ludwig, Alexander & Zimper, Alexander, 2007. "Attitude polarization," Sonderforschungsbereich 504 Publications 07-66, Sonderforschungsbereich 504, Universit├Ąt Mannheim & Sonderforschungsbereich 504, University of Mannheim.

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