A note on competitive investment under uncertainty
Name
28596168.pdf
Size
541.98 KB
Format
Adobe PDF
Checksum (MD5)
1f600a84660941aca7f282b499bb92a6
Author(s)
Pindyck, Robert S.
Date Issued
1991
Publisher
MIT Center for Energy and Environmental Policy Research
Series/Report no.
Working paper (Massachusetts Institute of Technology. Center for Energy Policy Research) ; MIT-CEPR 91-009.
Abstract
This paper clarifies how uncertainty affects irreversible investment in a competitive market equilibrium. With free entry, irreversibility affects the distribution of future prices, and thereby creates an opportunity cost of investing now rather than waiting. As with an imperfectly competitive firm, uncertainty can also increase the value of a marginal unit of capital. I show that with an infinite horizon, the opportunity cost is larger than this increase in value, so that uncertainty reduces investment.
Persistent DSpace Link
