Investment and Abandonment Decisions in the Presence of Imperfect Aggregation of Information

Universidad del CEMA Documento de Trabajo Nro. 362

21 Pages Posted: 16 Feb 2008

Date Written: December 2007

Abstract

The traditional marshallian rule of investing when the value of the investment is greater than its installment cost is modified in the presence of irreversibility and uncertainty, giving rise to an option component. Additionally, the interaction of participants holding each one a right to invest can give rise under imperfect information to situations of deviations from the optimal timing of exercise of the investment and to "herd behavior" or informational cascades given that the agents take into account when deciding not only their private set of information but also the information released to the market by the decisions made by the other agents. In the present paper we develop a model that tries to capture these effects and dynamics by showing revision of conditional expectations of the agents, and with considerations regarding the degree of dispersion of information in the economy and the effect of the number of participants and their effect into their behavior.

Keywords: real options, capital markets, investment, aggregation, information

JEL Classification: G00, O16, F36

Suggested Citation

Dapena, José Pablo, Investment and Abandonment Decisions in the Presence of Imperfect Aggregation of Information (December 2007). Universidad del CEMA Documento de Trabajo Nro. 362. Available at SSRN: https://ssrn.com/abstract=1093340 or http://dx.doi.org/10.2139/ssrn.1093340

Universidad del CEMA (Contact Author)

Universidad del CEMA - Department of Economics ( email )

Buenos Aires
Argentina
5411 6314-3000 (Phone)
5411 4314-1654 (Fax)

HOME PAGE: http://www.cema.edu.ar/publicaciones/jae.html

José Pablo Dapena

University of CEMA ( email )

1054 Buenos Aires
Argentina

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