High Heterogeneous Information and Investment under Uncertainty

Shawn Ni () and Ronald Ratti

No 709, Working Papers from Department of Economics, University of Missouri

Abstract: A sudden change in investment environment shifts objective uncertainty (characterized by parameters that determine the distribution of returns) and at the same time heightens subjective uncertainty (about the data generating parameters) unevenly across investors. For a given state of economy, the uncertainty facing the investor is the sum of the uncertainty in the data and the uncertainty of the investors assessment of the expected return distribution. In this model the option value of waiting to invest depends not only on the objective uncertainty as in the traditional theory but varies systematically with investor information and Bayesian updating of outlook for the project. Simulation of the model suggests that during a state characterized by greater uncertainty and higher potential expected return investment will be by an abnormally high percentage of informed investors and may increase overall. For over 10,000 instances of firm-level FDI data for Korea from 1996 to 2001, regression results are consistent with the hypothesis that disproportionably more FDI is made by experienced (hence more informed) investors during heightened uncertainty.

Keywords: uncertainty; investor information; option value; Bayesian updating; FDI (search for similar items in EconPapers)
JEL-codes: D8 E22 F21 (search for similar items in EconPapers)
Pages: 35 pgs.
Date: 2007-05-15
New Economics Papers: this item is included in nep-mac and nep-sea
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