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Irreversible investment and information acquisition under uncertainty

Author

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  • Caroline Orset

Abstract

We analyse the decision of an agent to invest in new industrial activities the con- sequences of which on people's health and the environment are initially unknown. The agent does not have the possibility of delaying her/his investment but s/he gets the opportunity to acquire information in order to reduce her/his uncertainty. We find that the agent always invests unless the cost exceeds the direct benefit, and does acquire information with a certain degree of precision. Moreover, we show that acquiring information can encourage the agent to make a larger investment. Likewise, we identify all factors that might modify the agent's decisions. We then discuss some political instruments that could make it easier for investors to both in- novate and acquire information. Finally, the impact of insurance on the investment and information acquisition decisions is also examined.

Suggested Citation

  • Caroline Orset, 2010. "Irreversible investment and information acquisition under uncertainty," Working Papers 2010/01, INRA, Economie Publique.
  • Handle: RePEc:apu:wpaper:2010/01
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    File URL: https://www6.versailles-grignon.inra.fr/economie_publique/Media/fichiers/Working-Papers/Working-Papers-2010/WP_2010_01
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    References listed on IDEAS

    as
    1. Pindyck, Robert S, 1981. " The Optimal Production of an Exhaustible Resource When Price is Exogenous and Stochastic," Scandinavian Journal of Economics, Wiley Blackwell, vol. 83(2), pages 277-288.
    2. Sinclair-Desgagne, Bernard & Gozlan, Estelle, 2003. "A theory of environmental risk disclosure," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 377-393, March.
    3. Crabbe, Philippe J., 1987. "The quasi-option value of irreversible investment: A comment," Journal of Environmental Economics and Management, Elsevier, vol. 14(4), pages 384-385, December.
    4. Kevin F. McCardle, 1985. "Information Acquisition and the Adoption of New Technology," Management Science, INFORMS, vol. 31(11), pages 1372-1389, November.
    5. Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 312-319.
    6. Fischer, Stanley, 1978. "Call Option Pricing when the Exercise Price Is Uncertain, and the Valuation of Index Bonds," Journal of Finance, American Finance Association, vol. 33(1), pages 169-176, March.
    7. Epstein, Larry G, 1980. "Decision Making and the Temporal Resolution of Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 269-283, June.
    8. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-1012, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Grants; Information acquisition; Innovation; Insurance; Irreversible investment; Risk; Uncertainty;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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