Sequential Investment in Emerging Technologies under Policy Uncertainty

31 Pages Posted: 16 Jun 2016

See all articles by Lars Sendstad

Lars Sendstad

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Michail Chronopoulos

City University London - Sir John Cass Business School; Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: June 14, 2016

Abstract

Investment in emerging technologies is particularly challenging, since, apart from uncertainty in revenue streams, firms must also take into account both policy uncertainty and the random arrival of innovations. We assume that the former is reflected in the sudden provision and retraction of a support scheme, which takes the form of a fixed premium on top of the output price. Thus, we develop an analytical framework for sequential investment in order to determine how price, technological, and policy uncertainty interact to affect the decision to invest sequentially in successively improved versions of an emerging technology. We show that greater likelihood of subsidy retraction lowers the incentive to invest, whereas greater likelihood of subsidy provision facilitates investment. However, embedded options to invest in improved technology versions raise the value of the investment opportunity, thereby mitigating the impact of subsidy retraction and making the impact of subsidy provision more pronounced. Additionally, by allowing for sequential policy interventions, we find that the impact of policy uncertainty becomes less pronounced as the number of policy interventions increases.

Keywords: Investment Analysis, Real Options, Policy Uncertainty, Technological Uncertainty

JEL Classification: G00, G11

Suggested Citation

Sendstad, Lars and Chronopoulos, Michail, Sequential Investment in Emerging Technologies under Policy Uncertainty (June 14, 2016). NHH Dept. of Business and Management Science Discussion Paper No. 2016/10. Available at SSRN: https://ssrn.com/abstract=2795475 or http://dx.doi.org/10.2139/ssrn.2795475

Lars Sendstad (Contact Author)

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

HOME PAGE: http://www.sendstad.com

Michail Chronopoulos

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://https://www.cass.city.ac.uk/

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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