IDEAS home Printed from https://ideas.repec.org/a/bla/scotjp/v57y2010i3p254-271.html
   My bibliography  Save this article

Options, Inaction, And Uncertainty

Author

Listed:
  • Giuseppe Bertola

Abstract

I outline and discuss economic insights afforded by the elegant and powerful continuous‐time techniques that economists discovered some 20 years ago. I do so in the context of a simple action‐timing problem that does not exploit those techniques, in order to illustrate how the role of uncertainty in shaping the optimality of adoption depends on substantive modeling details. I then outline the clearer implications popular and tractable continuous‐time continuous processes, noting that they may fail to represent key features of some real‐life business investment problems, but provide a suitable toolkit for treatment not only of financial phenomena but also of real option problems, such as those encountered in dynamic consumption problems, where small and unpredictable random changes are realistic.

Suggested Citation

  • Giuseppe Bertola, 2010. "Options, Inaction, And Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(3), pages 254-271, July.
    • Handle: RePEc:bla:scotjp:v:57:y:2010:i:3:p:254-271
    DOI: 10.1111/j.1467-9485.2009.00517.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1467-9485.2009.00517.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1467-9485.2009.00517.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Giuseppe Bertola & Luigi Guiso & Luigi Pistaferri, 2005. "Uncertainty and Consumer Durables Adjustment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(4), pages 973-1007.
    3. Christopher A. Pissarides, 1987. "Search, Wage Bargains and Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(3), pages 473-483.
    4. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    5. Dixit, Avinash, 1991. "A simplified treatment of the theory of optimal regulation of Brownian motion," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 657-673, October.
    6. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
    7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    8. Avner Bar-Ilan & Alan S. Blinder, 1988. "Consumer Durables and the Optimality of Usually Doing Nothing," NBER Working Papers 2488, National Bureau of Economic Research, Inc.
    9. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Davide Sala & Erdal Yalcin, 2012. "Export Experience of Managers and the Internationalization of Firms," ifo Working Paper Series 139, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2011. "Time is Running Out: The 2°C Target and Optimal Climate Policies," Dundee Discussion Papers in Economics 262, Economic Studies, University of Dundee.
    3. Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2011. "Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change," CESifo Working Paper Series 3516, CESifo.
    4. Erdal Yalcin & Davide Sala, 2014. "Uncertain Productivity Growth and the Choice between FDI and Export," Review of International Economics, Wiley Blackwell, vol. 22(1), pages 189-208, February.
    5. Danish Khattak & Ayaz Muhammad & Kashif Iqbal, 2014. "Determining the Relationship between Income Inequality, Economic Growth & Inflation," Journal of Social Economics, Research Academy of Social Sciences, vol. 1(3), pages 104-114.
    6. Davide Sala & Erdal Yalcin, 2015. "Export Experience of Managers and the Internationalisation of Firms," The World Economy, Wiley Blackwell, vol. 38(7), pages 1064-1089, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:bla:scotjp:v:57:y:2010:i:s1:p:254-271 is not listed on IDEAS
    2. N. Bloom, 2016. "Fluctuations in uncertainty," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 4.
    3. Bernard Njindan Iyke & Sin-Yu Ho, 2020. "The effects of transitory and permanent inflation uncertainty on investment in Ghana," Economic Change and Restructuring, Springer, vol. 53(1), pages 195-217, February.
    4. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    5. Bahmani-Oskooee, Mohsen & Hajilee, Massomeh, 2013. "Exchange rate volatility and its impact on domestic investment," Research in Economics, Elsevier, vol. 67(1), pages 1-12.
    6. Bernard Njindan Iyke & Sin-Yu Ho, 2017. "Exchange rate uncertainty and domestic investment in Ghana," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1362157-136, January.
    7. McGee, M. Kevin, 2010. "Twice constrained investment under uncertainty: A mixed time model," Research in Economics, Elsevier, vol. 64(2), pages 110-120, June.
    8. Robert S. Pindyck & Andrés Solimano, 1993. "Economic Instability and Aggregate Investment," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 259-318, National Bureau of Economic Research, Inc.
    9. Alan Carruth & Andy Dickerson & Andrew Henley, 2000. "What do We Know About Investment Under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-154, April.
    10. Miao, Jianjun & Wang, Neng, 2007. "Investment, consumption, and hedging under incomplete markets," Journal of Financial Economics, Elsevier, vol. 86(3), pages 608-642, December.
    11. Ferguson, Andrew & Hu, Wei & Lam, Peter, 2022. "Political uncertainty and deal structure: Evidence from Australian mining project acquisitions," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    12. Nguyen, Minh Hong & Trinh, Vu Quang, 2023. "U.K. economic policy uncertainty and innovation activities: A firm-level analysis," Journal of Economics and Business, Elsevier, vol. 123(C).
    13. Eberly, Janice C, 1994. "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 403-436, June.
    14. Olivier Blanchard, 2000. "What Do We Know about Macroeconomics that Fisher and Wicksell Did Not?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(4), pages 1375-1409.
    15. Isoré, Marlène & Szczerbowicz, Urszula, 2017. "Disaster risk and preference shifts in a New Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 97-125.
    16. Kaido Kepp & Kadri Männasoo, 2021. "Investment irreversibility and cyclical adversity: Implications for the financial performance of European manufacturing companies," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1665-1678, October.
    17. Klaus Mohn & Petter Osmundsen, 2011. "Asymmetry and uncertainty in capital formation: an application to oil investment," Applied Economics, Taylor & Francis Journals, vol. 43(28), pages 4387-4401.
    18. Martin Zagler, 2011. "Endogenous Growth, Efficiency Wages, and Persistent Unemployment," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 34-42, April.
    19. Bernard Dumas, "undated". "Perishable Investment and Hysteresis in Capital Formation," Rodney L. White Center for Financial Research Working Papers 44-88, Wharton School Rodney L. White Center for Financial Research.
    20. Thu Phuong Pham & Anh Tuan Bui, 2007. "The time to shut down," Economics Bulletin, AccessEcon, vol. 7(14), pages 1-14.
    21. Oscar Claveria & Petar Sorić, 2023. "Labour market uncertainty after the irruption of COVID-19," Empirical Economics, Springer, vol. 64(4), pages 1897-1945, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:scotjp:v:57:y:2010:i:3:p:254-271. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sesssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.