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Commitment as investment under uncertainty

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  • Joseph G. Haubrich
  • Joseph A. Ritter

Abstract

Irreversible investment and the techniques associated with pricing real options have led to significant advances many areas. We broaden this range of applications, showing how the techniques can apply to many policy problems in finance, macroeconomics, and trade policy. With small changes, standard techniques can handle a broad range of strategic problems related to policy. The decision to commit is like the decision to make an irreversible investment. Explicitly considering and correctly valuing the option to wait makes discretion relatively more attractive, implies that increased uncertainty increases the gain to discretion, and results in policy which displays hysteresis.

Suggested Citation

  • Joseph G. Haubrich & Joseph A. Ritter, 1996. "Commitment as investment under uncertainty," Working Papers 1995-004, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1995-004
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    1. Joseph G. Haubrich & Joseph A. Ritter, 1996. "Dynamic commitment and imperfect policy rules," Working Papers (Old Series) 9601, Federal Reserve Bank of Cleveland.

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