Investments of uncertain cost
I study irreversible investment decisions when projects take time to complete, and are subject to two types of uncertainty over the cost of completion. The first is technical uncertainty, i.e., uncertainty over the amount of time, effort, and materials that will ultimately be required to complete th...
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| Format: | Working Paper |
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MIT Center for Energy and Environmental Policy Research
2009
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| Online Access: | http://hdl.handle.net/1721.1/50176 |
| _version_ | 1811082121669771264 |
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| author | Pindyck, Robert S. |
| author_facet | Pindyck, Robert S. |
| author_sort | Pindyck, Robert S. |
| collection | MIT |
| description | I study irreversible investment decisions when projects take time to complete, and are subject to two types of uncertainty over the cost of completion. The first is technical uncertainty, i.e., uncertainty over the amount of time, effort, and materials that will ultimately be required to complete the project, and that is only resolved as the investment takes place. The second is input cost uncertainty, i.e., uncertainty over the prices and quantities of labor and materials that are expected to be required, and which is external to the firm's investment activity. This paper derives simple decision rules that maximize the firm's value, and that are easy to implement. I show how these two types of uncertainty have very different effects on the decision to invest, and how they affect the value of the opportunity to invest. |
| first_indexed | 2024-09-23T11:57:55Z |
| format | Working Paper |
| id | mit-1721.1/50176 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T11:57:55Z |
| publishDate | 2009 |
| publisher | MIT Center for Energy and Environmental Policy Research |
| record_format | dspace |
| spelling | mit-1721.1/501762019-04-11T05:55:30Z Investments of uncertain cost Pindyck, Robert S. I study irreversible investment decisions when projects take time to complete, and are subject to two types of uncertainty over the cost of completion. The first is technical uncertainty, i.e., uncertainty over the amount of time, effort, and materials that will ultimately be required to complete the project, and that is only resolved as the investment takes place. The second is input cost uncertainty, i.e., uncertainty over the prices and quantities of labor and materials that are expected to be required, and which is external to the firm's investment activity. This paper derives simple decision rules that maximize the firm's value, and that are easy to implement. I show how these two types of uncertainty have very different effects on the decision to invest, and how they affect the value of the opportunity to invest. Supported by the M.I.T. Center for Energy Policy Research. Supported by the National Science Foundation. 2009-12-15T23:56:52Z 2009-12-15T23:56:52Z 1992 Working Paper 92005 http://hdl.handle.net/1721.1/50176 28596230 Working paper (Massachusetts Institute of Technology. Center for Energy Policy Research) ; MIT-CEPR 92-005. 22 p application/pdf MIT Center for Energy and Environmental Policy Research |
| spellingShingle | Pindyck, Robert S. Investments of uncertain cost |
| title | Investments of uncertain cost |
| title_full | Investments of uncertain cost |
| title_fullStr | Investments of uncertain cost |
| title_full_unstemmed | Investments of uncertain cost |
| title_short | Investments of uncertain cost |
| title_sort | investments of uncertain cost |
| url | http://hdl.handle.net/1721.1/50176 |
| work_keys_str_mv | AT pindyckroberts investmentsofuncertaincost |