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Investment Timing and Technological Breakthroughs

Author

Listed:
  • Jean-Paul Décamps

    (Toulouse School of Economics, University of Toulouse Capitole, 31000 Toulouse, France)

  • Fabien Gensbittel

    (Toulouse School of Economics, University of Toulouse Capitole, 31000 Toulouse, France)

  • Thomas Mariotti

    (Toulouse School of Economics, University of Toulouse Capitole, 31000 Toulouse, France; and Toulouse School of Economics-Research, CNRS, University of Toulouse Capitole, 31000 Toulouse, France; and CEPR, London EC1V 0DX, United Kingdom; and CESifo, 81679 Munich, Germany)

Abstract

We study the optimal investment policy of a firm facing both technological and cash-flow uncertainty. At any point in time, the firm can irreversibly invest in a stand-alone technology or wait for a technological breakthrough. Breakthroughs occur when market conditions become favorable enough, exceeding a threshold value that is ex ante unknown to the firm. The Markov state variables for the optimal investment policy are the current market conditions and their historic maximum, and the firm optimally invests in the stand-alone technology only when market conditions deteriorate enough after reaching a maximum. The path-dependent return required for investing in the stand-alone technology is always higher than if no technological breakthroughs could occur and can take arbitrarily large values following certain histories. Decreases in development costs or increases in the value of the new technology make the firm more prone to bearing downside risk and delaying investment in the stand-alone technology.

Suggested Citation

  • Jean-Paul Décamps & Fabien Gensbittel & Thomas Mariotti, 2025. "Investment Timing and Technological Breakthroughs," Mathematics of Operations Research, INFORMS, vol. 50(2), pages 1478-1513, May.
    • Handle: RePEc:inm:ormoor:v:50:y:2025:i:2:p:1478-1513
    DOI: 10.1287/moor.2022.0022
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    Cited by:

    1. is not listed on IDEAS
    2. Doruk Cetemen & Can Urgun & Leeat Yariv, 2023. "Collective Progress: Dynamics of Exit Waves," Journal of Political Economy, University of Chicago Press, vol. 131(9), pages 2402-2450.

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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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