The impact of operational delay on irreversible investment under Knightian uncertainty

Laura Delaney

Economics Letters, 2022, vol. 215, issue C

Abstract: Lags between investing in a venture and when it comes into operation have a significant effect on the operative capacity of a firm. However, with a few exceptions, such lags are ignored in the modelling of irreversible investment under uncertainty. In this paper I examine the impact such lags have on the optimal investment strategy of a firm in the context of Knightian uncertainty (KU) and an ambiguity-averse investor. I find the effect of such lags to be significant in this context and, for high enough levels of KU, its widely reported negative impact on the threshold is reversed entirely by the delay. Furthermore, when KU and lags are jointly incorporated into a problem of irreversible investment under uncertainty, volatility impacts the NPV from investing (in the absence of either, it has no impact).

Keywords: Knightian uncertainty; Operational delay; Irreversible investment (search for similar items in EconPapers)
JEL-codes: C61 D81 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:215:y:2022:i:c:s0165176522001240

DOI: 10.1016/j.econlet.2022.110494

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