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Irreversible investment, uncertainty, and ambiguity: The case of bioenergy sector

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  • Jouvet, Pierre-André
  • Le Cadre, Elodie
  • Orset, Caroline

Abstract

We analyze production and investment decisions of an agent in industrial activities that are characterized by two forms of uncertainty: demand uncertainty (in terms of number of buyers) and competitive effect uncertainty (in terms of other energy resource). We apply our model on the bioenergy industries. We compare the case of an ambiguity neutral agent with that of an ambiguity averse agent. We show that the investment decision of an agent depends on the effects of both the capital investment and the level of production on the cost and the uncertainty the agent is confronted with. Moreover, we find that ambiguity aversion tends to decrease the agent's optimal levels of production and investment. Our numerical analysis of the French case illustrates the different effects associated with demand uncertainty and competitive effect uncertainty.

Suggested Citation

  • Jouvet, Pierre-André & Le Cadre, Elodie & Orset, Caroline, 2012. "Irreversible investment, uncertainty, and ambiguity: The case of bioenergy sector," Energy Economics, Elsevier, vol. 34(1), pages 45-53.
    • Handle: RePEc:eee:eneeco:v:34:y:2012:i:1:p:45-53
    DOI: 10.1016/j.eneco.2011.08.018
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    Cited by:

    1. Romano, Teresa & Fumagalli, Elena, 2018. "Greening the power generation sector: Understanding the role of uncertainty," Renewable and Sustainable Energy Reviews, Elsevier, vol. 91(C), pages 272-286.
    2. Stefan Dragos Cirstea & Andreea Cirstea & Irimie Emil Popa & Gabriel Radu, 2019. "The Role of Bioenergy in Transition to a Sustainable Bioeconomy – Study on EU Countries," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 21(50), pages 1-75, February.
    3. repec:aud:audfin:v:21:y:2019:i:50:p:75 is not listed on IDEAS
    4. Yi, Fujin & Lin, C.-Y. Cynthia & Thome, Karen, 2013. "An Analysis of the Effects of Government Subsidies and the Renewable Fuels Standard on the Fuel Ethanol Industry: A Structural Econometric Model," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150224, Agricultural and Applied Economics Association.

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    More about this item

    Keywords

    Ambiguity; Bioenergy; Irreversible investment; Uncertainty;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry

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