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Irreversible investment, uncertainty, and ambiguity: the case of bioenergy sector

  • Pierre-André Jouvet
  • Elodie Lecadre
  • Caroline Orset

We analyse the decision of an agent to invest and engage in industrial activities that are characterized by two forms of uncertainty: market size uncertainty and competitive effect uncertainty. We apply our model on the bioenergy industries. We compare the case of an ambiguity neutral agent with that of an ambiguity averse agent. We show that the investment decision of an agent depends on the effects of both the capital investment and the level of production on the cost and the uncertainty the agent is confronted with. Moreover, we find that ambiguity aversion tends to decrease the agent's optimal levels of production and investment. Our numerical analysis of the French case illustrates the different effects associated with market size uncertainty and competitive effect uncertainty.

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Paper provided by INRA, Economie Publique in its series Working Papers with number 2011/01.

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Date of creation: 31 Jan 2011
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Handle: RePEc:apu:wpaper:2011/01
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