An Equilibrium Model of Investment Under Uncertainty
We analyze the optimal investment decisions of heterogeneous firms in a competitive, uncertain environment, characterizing firms' investment strategies explicitly and deriving closed-form solutions for firm value. Real option premia remain significant, and are even unmitigated relative to the standard partial-equilibrium model when both are calibrated to observables. Firms consequently delay investment, choosing not to undertake some positive NPV projects. We compare competitive behavior to that of a strategic monopolist, and quantify the welfare loss associated with monopoly. Finally, the model predicts business cycle dependence on firm returns, with returns negatively skewed during industry expansions but positively skewed in industry recessions. , Oxford University Press.
Volume (Year): 20 (2007)
Issue (Month): 5 (2007 29)
|Contact details of provider:|| Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.|
Web page: http://www.rfs.oupjournals.org/
More information through EDIRC
|Order Information:||Web: http://www4.oup.co.uk/revfin/subinfo/|
When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:20:y:2007:i:5:p:1461-1502. 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: (Oxford University Press)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.