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Preventing Environmental Disasters in Investment under Uncertainty

Author

Listed:
  • Peter Kort

    (Tilburg University
    University of Antwerp)

  • Maria Lavrutich

    (Norwegian University of Science and Technology)

  • Cláudia Nunes

    (Instituto Superior Técnico)

  • Carlos Oliveira

    (Universidade de Lisboa
    REM-Research in Economics and Mathematics, CEMAPRE)

Abstract

The paper considers a firm that has the option to invest in a project with an unknown profitability, which is affected by general market uncertainty. The project has the adverse effect that it can cause environmental damage. In case the firm has the option to undertake preventive investment at the time of market entry, we get that preventive investment is significant when (i) the project revenue is large, (ii) the environmental incidents potentially cause a huge reduction of firm value, and (iii) when preventive investment substantially decreases the probability of environmental damage occurrence. The optimality of such a preventive investment results in a significant delay of the project investment. When the firm has the possibility to invest in the project first and do the preventive investment later, this will accelerate the project investment and will result in a larger preventive investment when it indeed will decide to do that one later.

Suggested Citation

  • Peter Kort & Maria Lavrutich & Cláudia Nunes & Carlos Oliveira, 2022. "Preventing Environmental Disasters in Investment under Uncertainty," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(1), pages 199-220, September.
    • Handle: RePEc:kap:enreec:v:83:y:2022:i:1:d:10.1007_s10640-021-00606-5
    DOI: 10.1007/s10640-021-00606-5
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    References listed on IDEAS

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