Finite Project Life and Uncertainty Effects on Investment

Journal of Economic Dynamics and Control, Vol. 32, No. 7, 2008

CentER Discussion Paper Series No. 2006-124

24 Pages Posted: 14 Jan 2007 Last revised: 1 Jul 2013

See all articles by Sebastian Gryglewicz

Sebastian Gryglewicz

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Kuno Huisman

Tilburg University, CentER; ASML

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

Date Written: November 1, 2006

Abstract

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

Gryglewicz, Sebastian and Huisman, Kuno J.M. and Kort, Peter, Finite Project Life and Uncertainty Effects on Investment (November 1, 2006). Journal of Economic Dynamics and Control, Vol. 32, No. 7, 2008, CentER Discussion Paper Series No. 2006-124, Available at SSRN: https://ssrn.com/abstract=956844

Sebastian Gryglewicz

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Kuno J.M. Huisman

Tilburg University, CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

ASML ( email )

De Run 6501
Veldhoven, 5504 DR
Netherlands

Peter Kort (Contact Author)

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

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