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Irreversible investment in alternative projects

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  • Jean-Paul Décamps
  • Thomas Mariotti
  • Stéphane Villeneuve

Abstract

We study the problem of a risk-neutral decision-maker who has to choose among two alternative investment projects of different scales under output price uncertainty. We provide parameter restrictions under which the optimal investment strategy is not a trigger strategy and the optimal investment region is dichotomous. Whenever the decision-maker has the opportunity to switch from the smaller scale to the larger scale project, the dichotomy of the investment region can persist even when the volatility of the output price process becomes large. Copyright Springer-Verlag Berlin/Heidelberg 2006

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  • Jean-Paul Décamps & Thomas Mariotti & Stéphane Villeneuve, 2006. "Irreversible investment in alternative projects," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(2), pages 425-448, June.
    • Handle: RePEc:spr:joecth:v:28:y:2006:i:2:p:425-448
    DOI: 10.1007/s00199-005-0629-2
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