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

Author

Listed:
  • Pierre-André Jouvet

    () (EconomiX and Climate Economics Chair)

  • Elodie Le Cadre

    () (UMR INRA-AgroParisTech Economie Publique - EconomiX, Université Paris Ouest Nanterre La Défense)

  • Caroline Orset

    () (UMR INRA-AgroParisTech Economie Publique)

Abstract

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 adverse 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.

Suggested Citation

  • Pierre-André Jouvet & Elodie Le Cadre & Caroline Orset, 2011. "Irreversible investment, uncertainty, and ambiguity: the case of bioenergy sector," Working Papers 1104, Chaire Economie du climat.
  • Handle: RePEc:cec:wpaper:1104
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    File URL: http://www.chaireeconomieduclimat.org/RePEc/cec/wpaper/11-03_WP_2011-04_Jouvet_LeCadre_Orset.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Yi, Fujin & Lin, C.-Y. Cynthia & Thome, Karen, 2013. "An Analysis of the Effects of Government Subsidies and the Renewable Fuels Standard on the Fuel Ethanol Industry: A Structural Econometric Model," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150224, Agricultural and Applied Economics Association.

    More about this item

    Keywords

    Ambiguity; Bioenergy; Irreversible investment; 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
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry

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