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Investment and abandonment decisions in the presence of imperfect aggregation of information


  • José Pablo Dapena


The traditional marshallian rule of investing when the value of the investment is greater than its installment cost is modified in the presence of irreversibility and uncertainty, giving rise to an option component. Additionally, the interaction of participants holding each one a right to invest can give rise under imperfect information to situations of deviations from the optimal timing of exercise of the investment and to "herd behavior" or informational cascades given that the agents take into account when deciding not only their private set of information but also the information released to the market by the decisions made by the other agents. In the present paper we develop a model that tries to capture these effects and dynamics by showing revision of conditional expectations of the agents, and with considerations regarding the degree of dispersion of information in the economy and the effect of the number of participants and their effect into their behavior.

Suggested Citation

  • José Pablo Dapena, 2007. "Investment and abandonment decisions in the presence of imperfect aggregation of information," CEMA Working Papers: Serie Documentos de Trabajo. 362, Universidad del CEMA.
  • Handle: RePEc:cem:doctra:362

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    References listed on IDEAS

    1. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-565, June.
    2. Ellison, Glenn & Fudenberg, Drew, 1993. "Rules of Thumb for Social Learning," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 612-643, August.
    3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    4. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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    More about this item


    real options; capital markets; investment; aggregation; information;

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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