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Increasing optimism and demand uncertainty

Author

Listed:
  • Julien Prat

    (Department of Economics, Vienna University)

Abstract

By allowing the initial prior over market size to be a mixture of distributions, this paper extends the model of irreversible investment under uncertainty proposed by Rob (1991). We find that capacity expansion fuels investors' optimism. It is shown in the paper that the crash is always preceded by a boom when the initial prior is a mixture of exponential distributions.

Suggested Citation

  • Julien Prat, 2005. "Increasing optimism and demand uncertainty," Economics Bulletin, AccessEcon, vol. 12(10), pages 1-8.
    • Handle: RePEc:ebl:ecbull:eb-05l10014
    as

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    File URL: http://www.accessecon.com/pubs/EB/2005/Volume12/EB-05L10014A.pdf
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    References listed on IDEAS

    as
    1. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
    2. Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(4), pages 655-675.
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    More about this item

    Keywords

    Learning Investment Uncertainty;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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