Investment Timing and Technological Breakthroughs

Jean-Paul Décamps (), Fabien Gensbittel and Thomas Mariotti ()
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Jean-Paul Décamps: Toulouse School of Economics, University of Toulouse Capitole, 31000 Toulouse, France
Thomas Mariotti: Toulouse School of Economics, University of Toulouse Capitole, 31000 Toulouse, France; and Toulouse School of Economics-Research, CNRS, University of Toulouse Capitole, 31000 Toulouse, France; and CEPR, London EC1V 0DX, United Kingdom; and CESifo, 81679 Munich, Germany

Mathematics of Operations Research, 2025, vol. 50, issue 2, 1478-1513

Abstract: We study the optimal investment policy of a firm facing both technological and cash-flow uncertainty. At any point in time, the firm can irreversibly invest in a stand-alone technology or wait for a technological breakthrough. Breakthroughs occur when market conditions become favorable enough, exceeding a threshold value that is ex ante unknown to the firm. The Markov state variables for the optimal investment policy are the current market conditions and their historic maximum, and the firm optimally invests in the stand-alone technology only when market conditions deteriorate enough after reaching a maximum. The path-dependent return required for investing in the stand-alone technology is always higher than if no technological breakthroughs could occur and can take arbitrarily large values following certain histories. Decreases in development costs or increases in the value of the new technology make the firm more prone to bearing downside risk and delaying investment in the stand-alone technology.

Keywords: Primary: 60G40; 91B70; investment timing; technological uncertainty; optimal stopping (search for similar items in EconPapers)
Date: 2025
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http://dx.doi.org/10.1287/moor.2022.0022 (application/pdf)

Related works:
Working Paper: Investment timing and technological breakthroughs (2025)
Working Paper: Investment Timing and Technological Breakthroughs (2024)
Working Paper: Investment Timing and Technological Breakthrough (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormoor:v:50:y:2025:i:2:p:1478-1513

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