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Irreversible investment and the value of information gathering

Daniel Sgroi

Economics Bulletin, 2003, vol. 4, issue 21, 1-12

Abstract: This note develops a model in which a firm has to decide whether to undertake an irreversible investment. The firm has the option to delay it's decision in an effort to observe the actions of other firms. It is shown that a problem, akin to the herding phenomenon also applies, despite the endogenous time framework. In the context of an investment decision this manifests itself as the failure of a positive-payoff project to be undertaken. The most novel finding is that attempts to overcome this difficulty by further information gathering will, as a side effect, generate additional delay which may be enough to offset the gains of any new information.

Keywords: herding (search for similar items in EconPapers)
JEL-codes: D8 (search for similar items in EconPapers)
Date: 2003-05-06
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