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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 .rms face a fast-changing technology environment, implying that investment projects are usually considered to have a .nite life.The present paper studies investment projects with .nite project life, and we .nd that, in contrast with the existing theory, investments may be accelerated by increased uncertainty.It is shown that this particularly happens when uncertainty is limited and project life is short.

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 .rms face a fast-changing technology environment, implying that investment projects are usually considered to have a .nite life.The present paper studies investment projects with .nite project life, and we .nd that, in contrast with the existing theory, investments may be accelerated by increased uncertainty.It is shown that this particularly happens when uncertainty is limited and project life is short.

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 .rms face a fast-changing technology environment, implying that investment projects are usually considered to have a .nite life.The present paper studies investment projects with .nite project life, and we .nd that, in contrast with the existing theory, investments may be accelerated by increased uncertainty.It is shown that this particularly happens when uncertainty is limited and project life is short.

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 .rms face a fast-changing technology environment, implying that investment projects are usually considered to have a .nite life.The present paper studies investment projects with .nite project life, and we .nd that, in contrast with the existing theory, investments may be accelerated by increased uncertainty.It is shown that this particularly happens when uncertainty is limited and project life is short.

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 .rms face a fast-changing technology environment, implying that investment projects are usually considered to have a .nite life.The present paper studies investment projects with .nite project life, and we .nd that, in contrast with the existing theory, investments may be accelerated by increased uncertainty.It is shown that this particularly happens when uncertainty is limited and project life is short.

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 .rms face a fast-changing technology environment, implying that investment projects are usually considered to have a .nite life.The present paper studies investment projects with .nite project life, and we .nd that, in contrast with the existing theory, investments may be accelerated by increased uncertainty.It is shown that this particularly happens when uncertainty is limited and project life is short.

This paper generalizes the theory of irreversible investment under uncertainty by allowing for risk averse investors in the absence of com-plete markets.Until now this theory has only been developed in the cases of risk neutrality, or risk aversion in combination with complete markets.Within a general setting, we prove the existence of a unique critical output price that distinguishes price regions in which it is optimal for a risk averse investor to invest and price regions in which one should refrain from investing.We use a class of utility functions that exhibit non-increasing absolute risk aversion to examine the e ects of risk aversion, price uncertainty, and other parameters on the optimal investment decision.We nd that risk aversion reduces investment, particularly if the investment size is large.Moreover, we nd that a rise in price uncertainty increases the value of deferring irreversible investments.This e ect is stronger for high levels of risk aversion.In addition, we provide, for the rst time, closed-form comparative statics formulas for the risk neutral investor.

This paper generalizes the theory of irreversible investment under uncertainty by allowing for risk averse investors in the absence of com-plete markets.Until now this theory has only been developed in the cases of risk neutrality, or risk aversion in combination with complete markets.Within a general setting, we prove the existence of a unique critical output price that distinguishes price regions in which it is optimal for a risk averse investor to invest and price regions in which one should refrain from investing.We use a class of utility functions that exhibit non-increasing absolute risk aversion to examine the e ects of risk aversion, price uncertainty, and other parameters on the optimal investment decision.We nd that risk aversion reduces investment, particularly if the investment size is large.Moreover, we nd that a rise in price uncertainty increases the value of deferring irreversible investments.This e ect is stronger for high levels of risk aversion.In addition, we provide, for the rst time, closed-form comparative statics formulas for the risk neutral investor.

This paper generalizes the theory of irreversible investment under uncertainty by allowing for risk averse investors in the absence of com-plete markets.Until now this theory has only been developed in the cases of risk neutrality, or risk aversion in combination with complete markets.Within a general setting, we prove the existence of a unique critical output price that distinguishes price regions in which it is optimal for a risk averse investor to invest and price regions in which one should refrain from investing.We use a class of utility functions that exhibit non-increasing absolute risk aversion to examine the e ects of risk aversion, price uncertainty, and other parameters on the optimal investment decision.We nd that risk aversion reduces investment, particularly if the investment size is large.Moreover, we nd that a rise in price uncertainty increases the value of deferring irreversible investments.This e ect is stronger for high levels of risk aversion.In addition, we provide, for the rst time, closed-form comparative statics formulas for the risk neutral investor.

This paper generalizes the theory of irreversible investment under uncertainty by allowing for risk averse investors in the absence of com-plete markets.Until now this theory has only been developed in the cases of risk neutrality, or risk aversion in combination with complete markets.Within a general setting, we prove the existence of a unique critical output price that distinguishes price regions in which it is optimal for a risk averse investor to invest and price regions in which one should refrain from investing.We use a class of utility functions that exhibit non-increasing absolute risk aversion to examine the e ects of risk aversion, price uncertainty, and other parameters on the optimal investment decision.We nd that risk aversion reduces investment, particularly if the investment size is large.Moreover, we nd that a rise in price uncertainty increases the value of deferring irreversible investments.This e ect is stronger for high levels of risk aversion.In addition, we provide, for the rst time, closed-form comparative statics formulas for the risk neutral investor.

This paper generalizes the theory of irreversible investment under uncertainty by allowing for risk averse investors in the absence of com-plete markets.Until now this theory has only been developed in the cases of risk neutrality, or risk aversion in combination with complete markets.Within a general setting, we prove the existence of a unique critical output price that distinguishes price regions in which it is optimal for a risk averse investor to invest and price regions in which one should refrain from investing.We use a class of utility functions that exhibit non-increasing absolute risk aversion to examine the e ects of risk aversion, price uncertainty, and other parameters on the optimal investment decision.We nd that risk aversion reduces investment, particularly if the investment size is large.Moreover, we nd that a rise in price uncertainty increases the value of deferring irreversible investments.This e ect is stronger for high levels of risk aversion.In addition, we provide, for the rst time, closed-form comparative statics formulas for the risk neutral investor.

We consider a firm's decision to replace an existing production technology with a new, more cost-efficient one.Kulatilaka and Perotti [1998, Management Science] nd that, in a two-period model, increased product market uncertainty could encourage the firm to invest strategically in the new technology.This paper extends their framework to a continuous-time model which adds flexibility in timing of the investment decision.This flexibility introduces an option value of waiting which increases with uncertainty.In contrast with the two-period model, despite the existence of the strategic option of becoming a market leader due to a lower marginal cost, more uncertainty always increases the expected time to invest.Furthermore, it is shown that under increased uncertainty the probability that the firm finds it optimal to invest within a given time period always decreases for time periods longer than the optimal time to invest in a deterministic case.For smaller time periods there are contrary effects so that the overall impact of increased uncertainty on the probability of investing is in this case ambiguous.

Existing real options literature provides relatively little insight into the impact of structural changes of the economic environment on the investment decision of the firm.We propose a method to model the impact of a policy change on investment behavior in which, contrary to the earlier models based on Poisson processes, uncertainty concerning the moment of the change can be explicitly accounted for.Moreover, probabilities of the change depend on the state of the dynamic system, what ensures the consistency of the action of the policy maker. We model the policy change as an upward jump in the (net) investment cost, which is, for instance, caused by a reduction in the investment tax credit.The firm has an incomplete information concerning the trigger value of the process for which the jump occurs.We derive the optimal investment rule maximizing the value of the firm.It is shown that the impact of trigger value uncertainty is non-monotonic: the investment threshold decreases with the trigger value uncertainty for low levels of uncertainty, while the reverse is true for high uncertainty levels.Finally, we present policy implications for the authority that result from the firm's value-maximizing behavior.

We consider a firm's decision to replace an existing production technology with a new, more cost-efficient one.Kulatilaka and Perotti [1998, Management Science] nd that, in a two-period model, increased product market uncertainty could encourage the firm to invest strategically in the new technology.This paper extends their framework to a continuous-time model which adds flexibility in timing of the investment decision.This flexibility introduces an option value of waiting which increases with uncertainty.In contrast with the two-period model, despite the existence of the strategic option of becoming a market leader due to a lower marginal cost, more uncertainty always increases the expected time to invest.Furthermore, it is shown that under increased uncertainty the probability that the firm finds it optimal to invest within a given time period always decreases for time periods longer than the optimal time to invest in a deterministic case.For smaller time periods there are contrary effects so that the overall impact of increased uncertainty on the probability of investing is in this case ambiguous.

Existing real options literature provides relatively little insight into the impact of structural changes of the economic environment on the investment decision of the firm.We propose a method to model the impact of a policy change on investment behavior in which, contrary to the earlier models based on Poisson processes, uncertainty concerning the moment of the change can be explicitly accounted for.Moreover, probabilities of the change depend on the state of the dynamic system, what ensures the consistency of the action of the policy maker. We model the policy change as an upward jump in the (net) investment cost, which is, for instance, caused by a reduction in the investment tax credit.The firm has an incomplete information concerning the trigger value of the process for which the jump occurs.We derive the optimal investment rule maximizing the value of the firm.It is shown that the impact of trigger value uncertainty is non-monotonic: the investment threshold decreases with the trigger value uncertainty for low levels of uncertainty, while the reverse is true for high uncertainty levels.Finally, we present policy implications for the authority that result from the firm's value-maximizing behavior.

Existing real options literature provides relatively little insight into the impact of structural changes of the economic environment on the investment decision of the firm.We propose a method to model the impact of a policy change on investment behavior in which, contrary to the earlier models based on Poisson processes, uncertainty concerning the moment of the change can be explicitly accounted for.Moreover, probabilities of the change depend on the state of the dynamic system, what ensures the consistency of the action of the policy maker. We model the policy change as an upward jump in the (net) investment cost, which is, for instance, caused by a reduction in the investment tax credit.The firm has an incomplete information concerning the trigger value of the process for which the jump occurs.We derive the optimal investment rule maximizing the value of the firm.It is shown that the impact of trigger value uncertainty is non-monotonic: the investment threshold decreases with the trigger value uncertainty for low levels of uncertainty, while the reverse is true for high uncertainty levels.Finally, we present policy implications for the authority that result from the firm's value-maximizing behavior.