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Real Options in a Ramsey style Growth Model

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  • Hanno Dihle

    (Institute for Economic Research, University of Freiburg)

Abstract

This paper studies the aggregate implications of microeconomic investment irreversibility and idiosyncratic uncertainty in a simple growth model by highlighting real option effects. We endogenize the drift rate of real option by connecting it to the state of the economy. Thereby, we extend the analysis of the optimal capital accumulation policy in the firm sector and show the different implications of idiosyncratic and aggregate uncertainty on growth dynamics.

Suggested Citation

  • Hanno Dihle, 2015. "Real Options in a Ramsey style Growth Model," Discussion Paper Series 32, Department of International Economic Policy, University of Freiburg, revised Dec 2015.
    • Handle: RePEc:fre:wpaper:32
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    File URL: https://www.iep.uni-freiburg.de/discussion-papers/repec/fre/wpaper/files/dp32_real_options_ramsay_growth_model.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Irreversible investment; Idiosyncratic uncertainty; real options; growth;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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