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The temporal resolution of uncertainty and the irreversibility effect

  • Narain, Urvashi
  • Hanemann, W. Michael

    ()

    (University of California, Berkeley. Dept of agricultural and resource economics and policy)

  • Fisher, Anthony C

    ()

    (University of California, Berkeley. Dept of agricultural and resource economics and policy)

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 (Epstein’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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File URL: http://repositories.cdlib.org/are_ucb/935/
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Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 935.

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Length: 29 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:are:cudare:935
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  1. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
  2. Albers, H. J. & Goldbach, M. J., 2000. "Irreversible ecosystem change, species competition, and shifting cultivation," Resource and Energy Economics, Elsevier, vol. 22(3), pages 261-280, July.
  3. Gollier, Christian & Jullien, Bruno & Treich, Nicolas, 2000. "Scientific progress and irreversibility: an economic interpretation of the 'Precautionary Principle'," Journal of Public Economics, Elsevier, vol. 75(2), pages 229-253, February.
  4. 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 269-83, June.
  5. Hartman, Richard, 1976. "Factor Demand with Output Price Uncertainty," American Economic Review, American Economic Association, vol. 66(4), pages 675-81, September.
  6. Schultz, Peter A & Kasting, James F, 1997. "Optimal reductions in CO2 emissions," Energy Policy, Elsevier, vol. 25(5), pages 491-500, April.
  7. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
  8. 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.
  9. Robert A. Jones & Joseph M. Ostroy, 1979. "Flexibilty and Uncertainty," UCLA Economics Working Papers 163, UCLA Department of Economics.
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