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Investment and Uncertainty With Time to Build: Evidence from U.S. Copper Mining

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  • Marmer, Vadim
  • Slade, Margaret

Abstract

The standard real-options model predicts that increased uncertainty discourages investment. When projects are large and take time to build, however, this prediction can be reversed. We investigate the investment/uncertainty relationship empirically using historical data on opening dates of new U.S. copper mines - large, irreversible projects with substantial construction lags. Both the timing of the decision to go forward and the price thresholds that trigger that decision are assessed. We find that, in this market, greater uncertainty encourages investment and lowers the price thresholds for many mines.

Suggested Citation

  • Marmer, Vadim & Slade, Margaret, 2016. "Investment and Uncertainty With Time to Build: Evidence from U.S. Copper Mining," Microeconomics.ca working papers vadim_marmer-2016-14, Vancouver School of Economics, revised 22 Dec 2016.
  • Handle: RePEc:ubc:pmicro:vadim_marmer-2016-14
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    File URL: http://microeconomics.ca/vadim_marmer/TimeToBuild241116.pdf
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    References listed on IDEAS

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    1. Victor Aguirregabiria & Junichi Suzuki, 2014. "Identification and counterfactuals in dynamic models of market entry and exit," Quantitative Marketing and Economics (QME), Springer, vol. 12(3), pages 267-304, September.
    2. Harchaoui, Tarek M & Lasserre, Pierre, 2001. "Testing the Option Value Theory of Irreversible Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 141-166, February.
    3. Favero, Carlo A & Pesaran, M Hashem & Sharma, Sunil, 1994. "A Duration Model of Irreversible Oil Investment: Theory and Empirical Evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(S), pages 95-112, Suppl. De.
    4. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    5. Folta, Timothy B. & Johnson, Douglas R. & O'Brien, Jonathan, 2006. "Uncertainty, irreversibility, and the likelihood of entry: An empirical assessment of the option to defer," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 432-452, November.
    6. Mohn, Klaus & Misund, Bård, 2009. "Investment and uncertainty in the international oil and gas industry," Energy Economics, Elsevier, vol. 31(2), pages 240-248, March.
    7. Slade, Margaret E., 1982. "Trends in natural-resource commodity prices: An analysis of the time domain," Journal of Environmental Economics and Management, Elsevier, vol. 9(2), pages 122-137, June.
    8. Ryan Kellogg, 2014. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," American Economic Review, American Economic Association, vol. 104(6), pages 1698-1734, June.
    9. Slade, Margaret E., 1982. "Cycles in natural-resource commodity prices: An analysis of the frequency domain," Journal of Environmental Economics and Management, Elsevier, vol. 9(2), pages 138-148, June.
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    More about this item

    Keywords

    Investment; Uncertainty; Real options; Copper mining; Exhaustible resources;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L72 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Other Nonrenewable Resources
    • Q39 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Other

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