The temporal resolution of uncertainty and the irreversibility effect
We define the irreversibility effect and demonstrate its importance in problems involving investment decisions under uncertainty. We establish several analytical and numerical results that suggest both that the effect holds more widely than generally recognized, and that an existing result (Epsteinâ€™s Theorem) giving a sufficient condition for determining whether the effect holds can be applied more widely than previously indicated, in particular to problems involving intertemporally nonseparable benefit functions. We further show that a low elasticity of intertemporal substitution will however result in failure of the effect, but that the effect will hold if the value of information increases in the degree of flexibility.
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- Robert A. Jones & Joseph M. Ostroy, 1979.
"Flexibilty and Uncertainty,"
UCLA Economics Working Papers
163, UCLA Department of Economics.
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- Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
- Schultz, Peter A & Kasting, James F, 1997. "Optimal reductions in CO2 emissions," Energy Policy, Elsevier, vol. 25(5), pages 491-500, April.
- Hanemann, W. Michael, 1989. "Information and the concept of option value," Journal of Environmental Economics and Management, Elsevier, vol. 16(1), pages 23-37, January.
- Hartman, Richard, 1976. "Factor Demand with Output Price Uncertainty," American Economic Review, American Economic Association, vol. 66(4), pages 675-81, September.
- Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
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