Individual preferences and the effect of uncertainty on irreversible investment |
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Authors: | Kazunobu Muro |
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Affiliation: | aFaculty of Econoinformatics, Himeji Dokkyo University, 7-2-1 Kamiohono, Himeji, Hyogo 670-8524, Japan |
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Abstract: | This paper considers a relationship between investment behavior and an agent’s preferences in a stochastic one-sector growth model with irreversible investment. Further, it explores the effect of uncertainty in investment policies by using a non-expected utility function. Since uncertainty has an impact on investment policies not only through an option value but also through a risk-adjusted time preference rate in a general equilibrium framework, it is significant to distinguish the two preference parameters of the agent. While the previous partial equilibrium models with irreversible investment have exhibited a negative relationship between the desired capital stock and uncertainty, this paper implies that it is possible to generate a positive relationship for the appropriate parameters. This shows that the results of Hartman and Abel have been robust even in a general equilibrium model. |
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Keywords: | Irreversible investment Relative risk aversion Intertemporal elasticity of substitution |
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