Timing of investment under technological and revenue-related uncertainties |
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Institution: | 1. Toulouse School of Economics (INRA and LERNA), France;2. University of Toulouse, Toulouse Business School, 20 bd Lascrosses, BP 7010, 31068 Toulouse Cedex 7, France;3. Toulouse School of Economics (IDEI and LERNA), France;1. School of Mathematics and Statistics, Zhengzhou University, Zhengzhou 450001, China;2. College of Mathematics and Information Sciences, Zhengzhou University of Light Industry, Zhengzhou 450002, China |
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Abstract: | The effects of two forms of uncertainty on the timing of irreversible investment are considered. Technological uncertainty is modeled as a Poisson arrival process that reduces the cost of investment, while revenue uncertainty is modeled as a diffusion process. Technological uncertainty has no effect on the optimal investment policy when revenue uncertainty is absent. However, when combined with revenue uncertainty, increased technological uncertainty makes investment less attractive relative to waiting. The paper also makes a more general point in clarifying the difference in how diffusion type of uncertainty and unidirectional stochastic progress affect investment timing. |
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