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Options, Inaction, And Uncertainty

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  • Giuseppe Bertola

Abstract

I outline and discuss economic insights afforded by the elegant and powerful continuous‐time techniques that economists discovered some 20 years ago. I do so in the context of a simple action‐timing problem that does not exploit those techniques, in order to illustrate how the role of uncertainty in shaping the optimality of adoption depends on substantive modeling details. I then outline the clearer implications popular and tractable continuous‐time continuous processes, noting that they may fail to represent key features of some real‐life business investment problems, but provide a suitable toolkit for treatment not only of financial phenomena but also of real option problems, such as those encountered in dynamic consumption problems, where small and unpredictable random changes are realistic.

Suggested Citation

  • Giuseppe Bertola, 2010. "Options, Inaction, And Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(3), pages 254-271, July.
    • Handle: RePEc:bla:scotjp:v:57:y:2010:i:3:p:254-271
    DOI: 10.1111/j.1467-9485.2009.00517.x
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    Cited by:

    1. Davide Sala & Erdal Yalcin, 2012. "Export Experience of Managers and the Internationalization of Firms," ifo Working Paper Series 139, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2011. "Time is Running Out: The 2°C Target and Optimal Climate Policies," Dundee Discussion Papers in Economics 262, Economic Studies, University of Dundee.
    3. Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2011. "Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change," CESifo Working Paper Series 3516, CESifo.
    4. Davide Sala & Erdal Yalcin, 2015. "Export Experience of Managers and the Internationalisation of Firms," The World Economy, Wiley Blackwell, vol. 38(7), pages 1064-1089, July.
    5. Erdal Yalcin & Davide Sala, 2014. "Uncertain Productivity Growth and the Choice between FDI and Export," Review of International Economics, Wiley Blackwell, vol. 22(1), pages 189-208, February.
    6. Danish Khattak & Ayaz Muhammad & Kashif Iqbal, 2014. "Determining the Relationship between Income Inequality, Economic Growth & Inflation," Journal of Social Economics, Research Academy of Social Sciences, vol. 1(3), pages 104-114.

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