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Irreversible investment, uncertainty, and ambiguity: The case of bioenergy sector

Pierre-André Jouvet, Elodie Le Cadre and Caroline Orset ()

Energy Economics, 2012, vol. 34, issue 1, 45-53

Abstract: We analyze production and investment decisions of an agent in industrial activities that are characterized by two forms of uncertainty: demand uncertainty (in terms of number of buyers) and competitive effect uncertainty (in terms of other energy resource). We apply our model on the bioenergy industries. We compare the case of an ambiguity neutral agent with that of an ambiguity averse agent. We show that the investment decision of an agent depends on the effects of both the capital investment and the level of production on the cost and the uncertainty the agent is confronted with. Moreover, we find that ambiguity aversion tends to decrease the agent's optimal levels of production and investment. Our numerical analysis of the French case illustrates the different effects associated with demand uncertainty and competitive effect uncertainty.

Keywords: Ambiguity; Bioenergy; Irreversible investment; Uncertainty (search for similar items in EconPapers)
JEL-codes: D21 D81 Q42 Q23 (search for similar items in EconPapers)
Date: 2012
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Working Paper: Irreversible investment, uncertainty, and ambiguity: The case of bioenergy sector (2012) Downloads
Working Paper: Irreversible investment, uncertainty, and ambiguity: the case of bioenergy sector (2011) Downloads
Working Paper: Irreversible investment, uncertainty, and ambiguity: the case of bioenergy sector (2011) Downloads
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