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Investment and abandonment decisions in the presence of imperfect aggregation of information

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  • José Pablo Dapena

Abstract

The traditional marshallian rule of investing when the value of the investment is greater than its installment cost is modified in the presence of irreversibility and uncertainty, giving rise to an option component. Additionally, the interaction of participants holding each one a right to invest can give rise under imperfect information to situations of deviations from the optimal timing of exercise of the investment and to "herd behavior" or informational cascades given that the agents take into account when deciding not only their private set of information but also the information released to the market by the decisions made by the other agents. In the present paper we develop a model that tries to capture these effects and dynamics by showing revision of conditional expectations of the agents, and with considerations regarding the degree of dispersion of information in the economy and the effect of the number of participants and their effect into their behavior.

Suggested Citation

  • José Pablo Dapena, 2007. "Investment and abandonment decisions in the presence of imperfect aggregation of information," CEMA Working Papers: Serie Documentos de Trabajo. 362, Universidad del CEMA.
    • Handle: RePEc:cem:doctra:362
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    File URL: https://www.ucema.edu.ar/publicaciones/download/documentos/362.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    real options; capital markets; investment; aggregation; information;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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