Finite project life and uncertainty effects on investment

Sebastian Gryglewicz, Kuno Huisman and Peter Kort

Journal of Economic Dynamics and Control, 2008, vol. 32, issue 7, 2191-2213

Abstract: This paper revisits the important result of the real options approach to investment under uncertainty, which states that increased uncertainty raises the value of waiting and thus decelerates investment. Typically in this literature projects are assumed to be perpetual. However, in today's economy firms face a fast-changing technology environment, implying that investment projects are usually considered to have a finite life. The present paper studies investment projects with finite project life, and we find that, in contrast with the existing theory, investments may be accelerated by increased uncertainty. It is shown that this particularly happens at low levels of uncertainty and when project life is short.

Date: 2008
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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: Finite Project Life and Uncertainty Effects on Investment (2006)
Working Paper: Finite Project Life and Uncertainty Effects on Investment (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:32:y:2008:i:7:p:2191-2213

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