The Temporal Resolution of Uncertainty and the Irreversibility Effect

Urvashi Narain, Michael Hanemann () and Anthony C. Fisher

Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: We define the irreversibility effect and demonstrate its importance in problems involving investment decisions under uncertainty. We establish several analytical and numerical results that suggest both that the effect holds more widely than generally recognized, and that an existing result (Epstein’s Theorem) giving a sufficient condition for determining whether the effect holds can be applied more widely than previously indicated, in particular to problems involving intertemporally nonseparable benefit functions. We further show that a low elasticity of intertemporal substitution will however result in failure of the effect, but that the effect will hold if the value of information increases in the degree of flexibility.

Keywords: investment irreversibility effect; economic models (search for similar items in EconPapers)
Date: 2004-10-01
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Working Paper: The Temporal Resolution of Uncertainty and the Irreversibility Effect (2004)
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