Investment under Uncertainty and the Recipient of the Entry Cost

34 Pages Posted: 13 Jul 2009

See all articles by Doron Lavee

Doron Lavee

Tel-Hai Academic College

Yishay Maoz

The Open University of Israel - Department of Management and Economics

Date Written: July 13, 2009

Abstract

A typical model of investment under uncertainty, where firms pay an irreversible cost in order to produce, is studied. The analysis has a novel focus on the recipient of this payment, which is modeled as a firm or government that sells a resource (or a right) necessary for the production of the final good. Our main finding is that the resource owner may choose to set the price of the resource at a level high enough so as to cause the producers of the final good to delay their purchase of the resource and withhold production. The resource owner does so because it expects increased demand for the final good in the future. Another important result is that the price of the resource is a decreasing function of the elasticity of demand for the final good.

Keywords: Investment, Uncertainty

JEL Classification: D81

Suggested Citation

Lavee, Doron and Maoz, Yishay, Investment under Uncertainty and the Recipient of the Entry Cost (July 13, 2009). Available at SSRN: https://ssrn.com/abstract=1433428 or http://dx.doi.org/10.2139/ssrn.1433428

Doron Lavee

Tel-Hai Academic College ( email )

Upper Galilee
Galil Elyon, 12210
Israel

Yishay Maoz (Contact Author)

The Open University of Israel - Department of Management and Economics ( email )

1 University Road
Raanana, 43107
Israel
9727781891 (Phone)
97297780668 (Fax)

HOME PAGE: http://www.openu.ac.il/Personal_sites/Yishay-Maoz.html

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