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Irreversible investment and the value of information gathering

Author

Listed:
  • Daniel Sgroi

    (Churchill College and Department of Applied Economics, University of Cambridge)

Abstract

This note develops a model in which a firm has to decide whether to undertake an irreversible investment. The firm has the option to delay it's decision in an effort to observe the actions of other firms. It is shown that a problem, akin to the herding phenomenon also applies, despite the endogenous time framework. In the context of an investment decision this manifests itself as the failure of a positive-payoff project to be undertaken. The most novel finding is that attempts to overcome this difficulty by further information gathering will, as a side effect, generate additional delay which may be enough to offset the gains of any new information.

Suggested Citation

  • Daniel Sgroi, 2003. "Irreversible investment and the value of information gathering," Economics Bulletin, AccessEcon, vol. 4(21), pages 1-12.
    • Handle: RePEc:ebl:ecbull:eb-03d80004
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    File URL: http://www.accessecon.com/pubs/EB/2003/Volume4/EB-03D80004A.pdf
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    Cited by:

    1. Rainer Niemann & Caren Sureth, 2011. "The Impact of Differential Capital Income Taxation on the Value of Risky Projects," Economics Bulletin, AccessEcon, vol. 31(2), pages 1047-1054.
    2. Bhalla, Manaswini, 2011. "Endogenous order and information aggregation," Research in Economics, Elsevier, vol. 65(4), pages 319-331, December.

    More about this item

    Keywords

    herding;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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