Title
Finite project life and uncertainty effects on investment Finite project life and uncertainty effects on investment
Author
Faculty/Department
Faculty of Applied Economics
Publication type
article
Publication
Amsterdam ,
Subject
Economics
Source (journal)
Journal of economic dynamics and control. - Amsterdam
Volume/pages
32(2008) :7 , p. 2191-2213
ISSN
0165-1889
ISI
000257601800007
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Affiliation
University of Antwerp
Abstract
This paper revisits the important result of the real options approach to investment under uncertainty, which states that increased uncertainty raises the value of waiting and thus decelerates investment. Typically in this literature projects are assumed to be perpetual. However, in today's economy firms face a fast-changing technology environment, implying that investment projects are usually considered to have a finite life. The present paper studies investment projects with finite project life, and we find that, in contrast with the existing theory, investments may be accelerated by increased uncertainty. It is shown that this particularly happens at low levels of uncertainty and when project life is short.
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