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Optimal procurement and investment in new technologies under uncertainty

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  • Arve, Malin
  • Zwart, Gijsbert

Abstract

We study a buyer’s optimal investment strategy for new technologies when costs evolve stochastically and are private information to the suppliers. In a real option setting, we show how the asymmetric information on the stochastic variables optimally distorts technology choice and investment timing. We find that with multiple technologies, asymmetric information may delay or speed up investment, compared to the first-best real option benchmark. We also suggest a payment structure that implements the buyer’s optimal investment timing as a Vickrey-type auction.

Suggested Citation

  • Arve, Malin & Zwart, Gijsbert, 2023. "Optimal procurement and investment in new technologies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    • Handle: RePEc:eee:dyncon:v:147:y:2023:i:c:s0165188923000118
    DOI: 10.1016/j.jedc.2023.104605
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    4. Panova, Elena & Garrett, Daniel F., 2023. "Regulating investments when both costs and need are private," TSE Working Papers 23-1429, Toulouse School of Economics (TSE).

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    More about this item

    Keywords

    Real option; Adverse selection; Dynamic contracting; Irreversible investment; Continuous time; Optimal stopping; Procurement; Principal-agent model;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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