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

Pierre-André Jouvet, Elodie Lecadre and Caroline Orset

No 2011/01, Working Papers from INRA, Economie Publique

Abstract: We analyse the decision of an agent to invest and engage in industrial activities that are characterized by two forms of uncertainty: market size uncertainty and competitive effect uncertainty. 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 market size uncertainty and competitive effect uncertainty.

Keywords: Ambiguity; Bioenergy; Irreversible investment; Uncertainty (search for similar items in EconPapers)
JEL-codes: D21 D81 Q23 Q42 (search for similar items in EconPapers)
Date: 2011-01-31
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Related works:
Journal Article: Irreversible investment, uncertainty, and ambiguity: The case of bioenergy sector (2012)
Working Paper: Irreversible investment, uncertainty, and ambiguity: The case of bioenergy sector (2012)
Working Paper: Irreversible investment, uncertainty, and ambiguity: the case of bioenergy sector (2011)
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