News About News: Information Arrival and Irreversible Investment

29 Pages Posted: 3 Mar 2000 Last revised: 3 Sep 2010

See all articles by Allan Drazen

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Plutarchos Sakellaris

University of Maryland - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 1999

Abstract

We analyze how uncertainty about when information about future returns to a project may be revealed affects investment. While 'good news' about future returns boosts investment, 'good news about news' (that is news that information may arrive sooner) is shown to depress investment. We show that early revelation increases the value of an irreversible investment project to a risk-neutral investor. We relate our results on preference for early revelation to results in non-expected utility theory. Our framework allows us to study irreversible investment projects whose value has a time-variable volatility. We also consider how heterogeneity of revelation information across firms may induce a better-informed firm to share its information with competitors.

Suggested Citation

Drazen, Allan and Sakellaris, Plutarchos, News About News: Information Arrival and Irreversible Investment (August 1999). NBER Working Paper No. t0244. Available at SSRN: https://ssrn.com/abstract=198348

Allan Drazen (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742-1815
United States
301-405-3477 (Phone)
301-405-7835 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Plutarchos Sakellaris

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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