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The Implications of Parameter Uncertainty for Irreversible Investment Decision

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  • Michael Sampson

Abstract

The author examines the effect of unknown expected growth rates on irreversible investment decisions. With parameter uncertainty, it may be optimal in some periods to delay investment no matter what the current value of the project in order to collect more data on the unknown parameter. The author argues this may explain downturns in investment associated with changes in regime. In those periods where investment is possible, parameter uncertainty introduces an upper threshold into the optimal investment rule. Thus, investment may be delayed because the value of the project is too high. A numerical illustration of these results is provided.

Suggested Citation

  • Michael Sampson, 1998. "The Implications of Parameter Uncertainty for Irreversible Investment Decision," Canadian Journal of Economics, Canadian Economics Association, vol. 31(4), pages 900-914, November.
    • Handle: RePEc:cje:issued:v:31:y:1998:i:4:p:900-914
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    Cited by:

    1. El-Shazly Alaa, 2004. "Investment Under Uncertainty in Egypt: A Real-Options Approach," Review of Middle East Economics and Finance, De Gruyter, vol. 2(2), pages 51-60, August.
    2. Michael Sampson, 2023. "Learning About New Eras," Annals of Economics and Finance, Society for AEF, vol. 24(1), pages 1-12, May.

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