Finite Project Life and Uncertainty Effects on Investment
CentER Discussion Paper Series No. 2006-124
24 Pages Posted: 14 Jan 2007 Last revised: 1 Jul 2013
Date Written: November 1, 2006
This paper revisits the important result of the real options approach to investment under uncertainty, which states that increased uncertainty raises the value of waiting and thus decelerates investment. Typically in this literature projects are assumed to be perpetual. However, in today's economy firms face a fast-changing technology environment, implying that investment projects are usually considered to have a finite life. The present paper studies investment projects with finite project life, and we find that, in contrast with the existing theory, investments may be accelerated by increased uncertainty. It is shown that this particularly happens at low levels of uncertainty and when project life is short.
Keywords: investment, uncertainty, finite project lenghth
JEL Classification: D92, E22, G31
Suggested Citation: Suggested Citation