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The impact of operational delay on irreversible investment under Knightian uncertainty

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  • Delaney, Laura

Abstract

Lags between investing in a venture and when it comes into operation have a significant effect on the operative capacity of a firm. However, with a few exceptions, such lags are ignored in the modelling of irreversible investment under uncertainty. In this paper I examine the impact such lags have on the optimal investment strategy of a firm in the context of Knightian uncertainty (KU) and an ambiguity-averse investor. I find the effect of such lags to be significant in this context and, for high enough levels of KU, its widely reported negative impact on the threshold is reversed entirely by the delay. Furthermore, when KU and lags are jointly incorporated into a problem of irreversible investment under uncertainty, volatility impacts the NPV from investing (in the absence of either, it has no impact).

Suggested Citation

  • Delaney, Laura, 2022. "The impact of operational delay on irreversible investment under Knightian uncertainty," Economics Letters, Elsevier, vol. 215(C).
    • Handle: RePEc:eee:ecolet:v:215:y:2022:i:c:s0165176522001240
    DOI: 10.1016/j.econlet.2022.110494
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    References listed on IDEAS

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    Cited by:

    1. Zhao, Zhiming & Liu, Yuyao & Pan, Qiong, 2023. "Cash holdings, ambiguity aversion, and investment puzzles," Economics Letters, Elsevier, vol. 229(C).
    2. Qing He & Yaqin Liu & Qian Yu & Chao Wei, 2022. "Risk Dominance Analysis of R&D Investment Cooperation in Dynamic Option Game," Sustainability, MDPI, vol. 15(1), pages 1-21, December.

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    More about this item

    Keywords

    Knightian uncertainty; Operational delay; Irreversible investment;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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