Mutually exclusive investment with technical uncertainty
A firm, which faces technical uncertainty as in Pindyck (1993) can choose between two mutually exclusive investment projects, Projects 1 and 2. The added option to exercise Project 2 makes the firm less likely to exercise Project 1. An increase in the degree of technical uncertainty, the investment rate or the investment value upon completion for Project 2 encourages the firm to exercise Project 2 by increasing the trigger level of the expected cost of Project 2. This, however, ambiguously affects the firm's incentive to exercise Project 1, as the firm would rather implement Project 1 (2) in a region where the expected cost of Project 2 is relatively high (low).
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Volume (Year): 43 (2011)
Issue (Month): 30 ()
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