IDEAS home Printed from https://ideas.repec.org/a/kap/enreec/v83y2022i1d10.1007_s10640-021-00606-5.html
   My bibliography  Save this article

Preventing Environmental Disasters in Investment under Uncertainty

Author

Listed:
  • Peter Kort

    (Tilburg University
    University of Antwerp)

  • Maria Lavrutich

    (Norwegian University of Science and Technology)

  • Cláudia Nunes

    (Instituto Superior Técnico)

  • Carlos Oliveira

    (Universidade de Lisboa
    REM-Research in Economics and Mathematics, CEMAPRE)

Abstract

The paper considers a firm that has the option to invest in a project with an unknown profitability, which is affected by general market uncertainty. The project has the adverse effect that it can cause environmental damage. In case the firm has the option to undertake preventive investment at the time of market entry, we get that preventive investment is significant when (i) the project revenue is large, (ii) the environmental incidents potentially cause a huge reduction of firm value, and (iii) when preventive investment substantially decreases the probability of environmental damage occurrence. The optimality of such a preventive investment results in a significant delay of the project investment. When the firm has the possibility to invest in the project first and do the preventive investment later, this will accelerate the project investment and will result in a larger preventive investment when it indeed will decide to do that one later.

Suggested Citation

  • Peter Kort & Maria Lavrutich & Cláudia Nunes & Carlos Oliveira, 2022. "Preventing Environmental Disasters in Investment under Uncertainty," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(1), pages 199-220, September.
    • Handle: RePEc:kap:enreec:v:83:y:2022:i:1:d:10.1007_s10640-021-00606-5
    DOI: 10.1007/s10640-021-00606-5
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10640-021-00606-5
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10640-021-00606-5?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
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kuno J.M. Huisman & Peter M. Kort, 2015. "Strategic capacity investment under uncertainty," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 376-408, June.
    2. Hagspiel, Verena & Huisman, Kuno J.M. & Kort, Peter M. & Lavrutich, Maria N. & Nunes, Cláudia & Pimentel, Rita, 2020. "Technology adoption in a declining market," European Journal of Operational Research, Elsevier, vol. 285(1), pages 380-392.
    3. Lundgren, Tommy & Olsson, Rickard, 2010. "Environmental Incidents and Firm Value –International Evidence using a MultiFactor Event Study Framework," CERE Working Papers 2010:3, CERE - the Center for Environmental and Resource Economics.
    4. Ryan Kellogg, 2014. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," American Economic Review, American Economic Association, vol. 104(6), pages 1698-1734, June.
    5. Richard F. Hartl, 1992. "Optimal Acquisition of Pollution Control Equipment Under Uncertainty," Management Science, INFORMS, vol. 38(5), pages 609-622, May.
    6. Martzoukos, Spiros H. & Trigeorgis, Lenos, 2002. "Real (investment) options with multiple sources of rare events," European Journal of Operational Research, Elsevier, vol. 136(3), pages 696-706, February.
    7. Farzin, Y. H. & Huisman, K. J. M. & Kort, P. M., 1998. "Optimal timing of technology adoption," Journal of Economic Dynamics and Control, Elsevier, vol. 22(5), pages 779-799, May.
    8. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    9. Bengt Kristrom & Tommy Lundgren, 2003. "Abatement investments and green goodwill," Applied Economics, Taylor & Francis Journals, vol. 35(18), pages 1915-1921.
    10. Brian W. Jacobs & Vinod R. Singhal, 2020. "Shareholder Value Effects of the Volkswagen Emissions Scandal on the Automotive Ecosystem," Production and Operations Management, Production and Operations Management Society, vol. 29(10), pages 2230-2251, October.
    11. Michail Chronopoulos & Verena Hagspiel & Stein-Erik Fleten, 2016. "Stepwise Green Investment under Policy Uncertainty," The Energy Journal, , vol. 37(4), pages 87-108, October.
    12. Tommy Lundgren & Rickard Olsson, 2010. "Environmental incidents and firm value-international evidence using a multi-factor event study framework," Applied Financial Economics, Taylor & Francis Journals, vol. 20(16), pages 1293-1307.
    13. Nick Huberts & Kuno Huisman & Peter Kort & Maria Lavrutich, 2015. "Capacity Choice in (Strategic) Real Options Models: A Survey," Dynamic Games and Applications, Springer, vol. 5(4), pages 424-439, December.
    14. Tommy Lundgren, 2003. "A Real Options Approach to Abatement Investments and Green Goodwill," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 25(1), pages 17-31, May.
    15. Dalby, Peder A.O. & Gillerhaugen, Gisle R. & Hagspiel, Verena & Leth-Olsen, Tord & Thijssen, Jacco J.J., 2018. "Green investment under policy uncertainty and Bayesian learning," Energy, Elsevier, vol. 161(C), pages 1262-1281.
    16. Dangl, Thomas, 1999. "Investment and capacity choice under uncertain demand," European Journal of Operational Research, Elsevier, vol. 117(3), pages 415-428, September.
    17. Dolan, C. & Blanchet, J. & Iyengar, G. & Lall, U., 2018. "A model robust real options valuation methodology incorporating climate risk," Resources Policy, Elsevier, vol. 57(C), pages 81-87.
    18. Beavis, Brian & Dobbs, Ian M., 1986. "The dynamics of optimal environmental regulation," Journal of Economic Dynamics and Control, Elsevier, vol. 10(3), pages 415-423, September.
    19. Yin, Runsheng & Newman, David H., 1996. "The Effect of Catastrophic Risk on Forest Investment Decisions," Journal of Environmental Economics and Management, Elsevier, vol. 31(2), pages 186-197, September.
    20. Nunes, Cláudia & Oliveira, Carlos & Pimentel, Rita, 2021. "Quasi-analytical solution of an investment problem with decreasing investment cost due to technological innovations," Journal of Economic Dynamics and Control, Elsevier, vol. 130(C).
    21. John Maxwell & Christopher Decker, 2006. "Voluntary Environmental Investment and Responsive Regulation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 33(4), pages 425-439, April.
    Full references (including those not matched with items on IDEAS)

    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. Bigerna, Simona & Hagspiel, Verena & Kort, Peter M. & Wen, Xingang, 2023. "How damaging are environmental policy targets in terms of welfare?," European Journal of Operational Research, Elsevier, vol. 311(1), pages 354-372.
    2. Sarkar, Sudipto, 2021. "The uncertainty-investment relationship with endogenous capacity," Omega, Elsevier, vol. 98(C).
    3. Nagy, Roel L.G. & Hagspiel, Verena & Kort, Peter M., 2021. "Green capacity investment under subsidy withdrawal risk," Energy Economics, Elsevier, vol. 98(C).
    4. Balter, Anne G. & Huisman, Kuno J.M. & Kort, Peter M., 2022. "Effects of creative destruction on the size and timing of an investment," International Journal of Production Economics, Elsevier, vol. 252(C).
    5. Ketelaars, Martijn & Kort, Peter M., 2022. "Investments in R&D and Production Capacity with Uncertain Breakthrough Time : Private versus Social Incentives," Discussion Paper 2022-010, Tilburg University, Center for Economic Research.
    6. Huberts, Nick F.D. & Rossi Silveira, Rafael, 2023. "How economic depreciation shapes the relationship of uncertainty with investments’ size & timing," International Journal of Production Economics, Elsevier, vol. 260(C).
    7. Bigerna, Simona & Wen, Xingang & Hagspiel, Verena & Kort, Peter M., 2019. "Green electricity investments: Environmental target and the optimal subsidy," European Journal of Operational Research, Elsevier, vol. 279(2), pages 635-644.
    8. Hagspiel, Verena & Kort, Peter M. & Nunes, Cláudia & Pimentel, Rita & Støre, Kristian, 2021. "Capacity optimization of an innovating firm," International Journal of Production Economics, Elsevier, vol. 233(C).
    9. Balliauw, Matteo & Kort, Peter M. & Zhang, Anming, 2019. "Capacity investment decisions of two competing ports under uncertainty: A strategic real options approach," Transportation Research Part B: Methodological, Elsevier, vol. 122(C), pages 249-264.
    10. Lavrutich, Maria & Hagspiel, Verena & Siddiqui, Afzal S., 2023. "Transmission investment under uncertainty: Reconciling private and public incentives," European Journal of Operational Research, Elsevier, vol. 304(3), pages 1167-1188.
    11. Azevedo, Alcino & Pereira, Paulo J. & Rodrigues, Artur, 2021. "Optimal timing and capacity choice with taxes and subsidies under uncertainty," Omega, Elsevier, vol. 102(C).
    12. Paxson, Dean & Pereira, Paulo J. & Rodrigues, Artur, 2022. "Investment timing, capacity choice and optimal floors and ceilings," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    13. Barbosa, Luciana & Nunes, Cláudia & Rodrigues, Artur & Sardinha, Alberto, 2020. "Feed-in tariff contract schemes and regulatory uncertainty," European Journal of Operational Research, Elsevier, vol. 287(1), pages 331-347.
    14. Zhang, Zixuan & Chronopoulos, Michail & Kyriakou, Ioannis & Dimitrova, Dimitrina S., 2024. "Bi-level optimisation of subsidy and capacity investment under competition and uncertainty," European Journal of Operational Research, Elsevier, vol. 318(1), pages 327-340.
    15. Kort, Peter & Lavrutich, Maria & Nunes, Cláudia & Oliveira, Carlos, 2023. "Preventive investment, malfunctions and liability," International Journal of Production Economics, Elsevier, vol. 263(C).
    16. Balliauw, Matteo, 2021. "Time to build: A real options analysis of port capacity expansion investments under uncertainty," Research in Transportation Economics, Elsevier, vol. 90(C).
    17. Silaghi, Florina & Sarkar, Sudipto, 2021. "Agency problems in public-private partnerships investment projects," European Journal of Operational Research, Elsevier, vol. 290(3), pages 1174-1191.
    18. Ketelaars, Martijn, 2024. "Clearing in financial networks and dynamic investment under uncertainty," Other publications TiSEM 94768fb9-fd72-405d-a330-6, Tilburg University, School of Economics and Management.
    19. Tommy Lundgren, 2003. "A Real Options Approach to Abatement Investments and Green Goodwill," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 25(1), pages 17-31, May.
    20. Hagspiel, V. & Huisman, Kuno & Kort, Peter M. & Nunes, Claudia & Pimentel, Rita, 2018. "Product Innovation of an Incumbent Firm : A Dynamic Analysis," Discussion Paper 2018-048, Tilburg University, Center for Economic Research.

    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:kap:enreec:v:83:y:2022:i:1:d:10.1007_s10640-021-00606-5. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    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.