Investment Under Uncertainty and Policy Change
29 Pages Posted: 28 May 2001
Date Written: March 2002
Abstract
In this paper the impact of policy change on the investment behavior of the firm is studied. The change occurs when a stochastic process describing the state of the economic environment reaches a certain trigger. In our setting both the firm's conjecture concerning the trigger as well as the precision of this conjecture serve as input parameters. We derive the optimal investment rule maximizing the value of the firm. We show 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. Furthermore, it is shown that the uncertainty concerning the magnitude of the change delays investment. Finally, based on the firm's value-maximizing behavior, policy implications for the authority are presented.
Keywords: investment under uncertainty, real options, policy change
JEL Classification: C61, D81, G31
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Uncertainty about Government Policy and Stock Prices
By Lubos Pastor and Pietro Veronesi
-
Uncertainty About Government Policy and Stock Prices
By Lubos Pastor and Pietro Veronesi
-
Uncertainty About Government Policy and Stock Prices
By Lubos Pastor and Pietro Veronesi
-
Uncertainty About Government Policy and Stock Prices
By Lubos Pastor and Pietro Veronesi
-
Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?
-
Measuring Economic Policy Uncertainty
By Scott R. Baker, Nicholas Bloom, ...
-
Political Uncertainty and Corporate Investment Cycles
By Brandon Julio and Youngsuk Yook