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Investment under Uncertainty - the Case of Repeated Investment Options

Author

Listed:
  • Nikolaj Malchow-Moeller
  • Bo Jellesmark Thorsen

    (Department of Economics, University of Aarhus, Denmark)

Abstract

This paper considers optimal investment behaviour when investment options evolve deterministically or stochastically over time and investments are irreversible and indivisible. It extends the standard investment-under-uncertainty set-up with a single investment option to the case of repeated options. Analytical solutions are derived for the deterministic case and for the case of a geometric Brownian motion. It is argued that when investment options are repeated, the simple net-present-value rule in general fares better as an investment criterion than the rule derived from the single-option approach. Furthermore, sensitivity analyses reveal that the effects of parameter changes are very different when using the repeated-options approach instead of the single-option approach.

Suggested Citation

  • Nikolaj Malchow-Moeller & Bo Jellesmark Thorsen, "undated". "Investment under Uncertainty - the Case of Repeated Investment Options," Economics Working Papers 2000-15, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:aarhec:2000-15
    as

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    File URL: https://repec.econ.au.dk/repec/afn/wp/00/wp00_15.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Geometric Brownian motion; indivisibility; investment; irreversibility; repeated options; replacement; stochastic processes; technology; uncertainty;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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