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Irreversible Investment in Competitive Projects: A New Motive for Waiting to Invest

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  • BOBTCHEFF Catherine

    (LERNA, University of Toulouse)

  • VILLENEUVE Stephane

Abstract

We analyze a model of irreversible investment with two sources of uncertainty. A risk-neutral decision maker has the choice between two mutually exclusive projects under input price and output price uncertainty. We propose a complete study of the shape of the rational investment region and we prove that it is never optimal to invest when the alternative investments generate the same payoff independently of its size. A key feature of this bidimensional degree of uncertainty is thus that the payoff generated by each project is not a sufficient statistic to make a rational investment. In this context, our analysis provides a new motive for waiting to invest: the benefits associated with the dominance of one project over the other. As an illustration, we apply our methodology to power generation under uncertainty.
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  • BOBTCHEFF Catherine & VILLENEUVE Stephane, 2006. "Irreversible Investment in Competitive Projects: A New Motive for Waiting to Invest," LERNA Working Papers 06.20.213, LERNA, University of Toulouse.
    • Handle: RePEc:ler:wpaper:06.20.213
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    2. Adkins, Roger & Paxson, Dean, 2019. "Rescaling-contraction with a lower cost technology when revenue declines," European Journal of Operational Research, Elsevier, vol. 277(2), pages 574-586.
    3. Cui, Zhenyu & Kirkby, J. Lars & Nguyen, Duy, 2021. "A data-driven framework for consistent financial valuation and risk measurement," European Journal of Operational Research, Elsevier, vol. 289(1), pages 381-398.
    4. Nishihara, Michi & Shibata, Takashi, 2013. "The effects of external financing costs on investment timing and sizing decisions," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1160-1175.
    5. Tsekrekos, Andrianos E. & Yannacopoulos, Athanasios N., 2016. "Optimal switching decisions under stochastic volatility with fast mean reversion," European Journal of Operational Research, Elsevier, vol. 251(1), pages 148-157.
    6. Bahareh Mosadegh Sedghy & Rémy Lambert & Lota Dabio Tamini, 2016. "Supply response of corn farmers in Quebec: Analyzing the impact of prices volatility?," Cahiers de recherche CREATE 2016-1, CREATE.
    7. Ioannidis, Christos & Pym, David & Williams, Julian, 2012. "Information security trade-offs and optimal patching policies," European Journal of Operational Research, Elsevier, vol. 216(2), pages 434-444.
    8. Detemple, Jerome & Kitapbayev, Yerkin, 2020. "The value of green energy under regulation uncertainty," Energy Economics, Elsevier, vol. 89(C).
    9. Detemple, Jerome & Kitapbayev, Yerkin, 2022. "Optimal technology adoption for power generation," Energy Economics, Elsevier, vol. 111(C).
    10. Jerome Detemple & Yerkin Kitapbayev, 2021. "Optimal Power Investment and Pandemics: A Micro-Economic Analysis," Energies, MDPI, vol. 14(4), pages 1-25, February.
    11. Gaïgi, M’hamed & Ly Vath, Vathana & Scotti, Simone, 2022. "Optimal harvesting under marine reserves and uncertain environment," European Journal of Operational Research, Elsevier, vol. 301(3), pages 1181-1194.
    12. Michi Nishihara, 2010. "A model for determining whether a firm should exercise multiple real options individually or simultaneously," Discussion Papers in Economics and Business 10-12, Osaka University, Graduate School of Economics.
    13. BOBTCHEFF Catherine, 2008. "Real Options and Technology Choice under Bertrand Competition," LERNA Working Papers 08.16.260, LERNA, University of Toulouse.
    14. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.
    15. Nishihara, Michi, 2014. "Preemptive investment game with alternative projects," Economic Modelling, Elsevier, vol. 43(C), pages 124-135.
    16. Zhu, Lei & Li, Li & Su, Bin, 2021. "The price-bidding strategy for investors in a renewable auction: An option games–based study," Energy Economics, Elsevier, vol. 100(C).
    17. Guo, Jian-Xin & Zhu, Kaiwei, 2021. "Implications for enterprise to adopt cleaner technology: From the perspective of energy market and commodity market," Research in International Business and Finance, Elsevier, vol. 57(C).
    18. Mosadegh Sedghy, Bahareh & Tamini, Lota Dabio & Lambert, Remy, 2018. "Effects of Price Insurance Programs on Supply Response: A Case Study of Corn Farmers in Quebec," MPRA Paper 93816, University Library of Munich, Germany, revised 30 Nov 2018.

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