To Invest or Not To Invest: An Economic Demonstration of Buridan's Ass

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serval:BIB_2CD0EC1A46F5
Type
Unpublished: a document having an author and title, but not formally published.
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Publications
Title
To Invest or Not To Invest: An Economic Demonstration of Buridan's Ass
Author(s)
Bobtcheff Catherine, Stéphane Villeneuve
Issued date
2007
Notes
Cahier du LERNA 06.20.213. Submitted for publication
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 their 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.
Keywords
K3
Create date
19/11/2007 9:57
Last modification date
20/08/2019 13:11
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