Finite project life and uncertainty effects on investment
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 firms face a fast-changing technology environment, implying that investment projects are usually considered to have a finite life. The present paper studies investment projects with finite project life, and we find that, in contrast with the existing theory, investments may be accelerated by increased uncertainty. It is shown that this particularly happens at low levels of uncertainty and when project life is short.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Metcalf, Gilbert E. & Hassett, Kevin A., 1995.
"Investment under alternative return assumptions Comparing random walks and mean reversion,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 19(8), pages 1471-1488, November.
- Gilbert E. Metcalf & Kevin A. Hassett, 1995. "Investment Under Alternative Return Assumptions: Comparing Random Walks and Mean Reversion," NBER Technical Working Papers 0175, National Bureau of Economic Research, Inc.
- Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
- Sarkar, Sudipto, 2000. "On the investment-uncertainty relationship in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 219-225, February.
- Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
- Grenadier, Steven R. & Wang, Neng, 2005.
"Investment timing, agency, and information,"
Journal of Financial Economics,
Elsevier, vol. 75(3), pages 493-533, March.
- Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
- Guo, Xin & Miao, Jianjun & Morellec, Erwan, 2005.
"Irreversible investment with regime shifts,"
Journal of Economic Theory,
Elsevier, vol. 122(1), pages 37-59, May.
- Saman Majd & Robert S. Pindyck, 1985.
"Time to Build, Option Value, and Investment Decisions,"
NBER Working Papers
1654, National Bureau of Economic Research, Inc.
- Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
- Jianjun Miao, 2003.
"Optimal Capital Structure and Industry Dynamics,"
- Ricardo J. Caballero & Robert S. Pindyck, 1992.
"Uncertainty, Investment, and Industry Evolution,"
NBER Working Papers
4160, National Bureau of Economic Research, Inc.
- Hong Bo & Robert Lensin, 2005. "Is the Investment-Uncertainty Relationship Nonlinear? An Empirical Analysis for the Netherlands," Economica, London School of Economics and Political Science, vol. 72(286), pages 307-331, 05.
- Pauli Murto, 2004. "Exit in Duopoly Under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 111-127, Spring.
- Jonathan Treussard & Doriana Ruffino, 2007.
"Lumps and Clusters in Duopolistic Investment Games: An Early Exercise Premium Approach,"
2007 Meeting Papers
77, Society for Economic Dynamics.
- Doriana Ruffino & Jonathan Treussard, 2006. "Lumps and Clusters in Duopolistic Investment Games: An Early Exercise Premium Approach," Boston University - Department of Economics - Working Papers Series WP2006-044, Boston University - Department of Economics.
- Lee, Cheng F. & Wu, Chunchi & Wei, K. C. John, 1990. "The Heterogeneous Investment Horizon and the Capital Asset Pricing Model: Theory and Implications," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(03), pages 361-376, September.
- Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-88, March.
- Sarkar, Sudipto, 2003. "The effect of mean reversion on investment under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 377-396, November.
- Pawlina, Grzegorz & Kort, Peter M., 2005.
"Investment under uncertainty and policy change,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 29(7), pages 1193-1209, July.
- Pawlina, G. & Kort, P.M., 2001. "Investment Under Uncertainty and Policy Change," Discussion Paper 2001-5, Tilburg University, Center for Economic Research.
- Pawlina, G. & Kort, P.M., 2004. "Investment under uncertainty and policy change," Other publications TiSEM dc869876-eaea-427c-ad5f-5, Tilburg University, School of Economics and Management.
- Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
- Wong, Kit Pong, 2007. "The effect of uncertainty on investment timing in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2152-2167, July.
- Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
- Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
- Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-79, December.
- Zeira, Joseph, 1990. "Cost uncertainty and the rate of investment," Journal of Economic Dynamics and Control, Elsevier, vol. 14(1), pages 53-63, February.
- Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-22, June.
- Steven Li, 2003. "A valuation model for firms with stochastic earnings," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(3), pages 229-243.
- Dangl, Thomas & Wirl, Franz, 2004. "Investment under uncertainty: calculating the value function when the Bellman equation cannot be solved analytically," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1437-1460, April.
- Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
- Bansal, Ravi & Viswanathan, S, 1993. " No Arbitrage and Arbitrage Pricing: A New Approach," Journal of Finance, American Finance Association, vol. 48(4), pages 1231-62, September.
- Morellec, Erwan & Zhdanov, Alexei, 2005. "The dynamics of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 77(3), pages 649-672, September.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:32:y:2008:i:7:p:2191-2213. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.