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Technology choice under several uncertainty sources

Catherine Bobtcheff () and Stephane Villeneuve

European Journal of Operational Research, 2010, vol. 206, issue 3, 586-600

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 its 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: Investment; under; uncertainty; Technology; choice; Optimal; stopping; Real; options (search for similar items in EconPapers)
Date: 2010
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Working Paper: Irreversible Investment in Competitive Projects: A New Motive for Waiting to Invest (2006) Downloads
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Handle: RePEc:eee:ejores:v:206:y:2010:i:3:p:586-600