Mutually exclusive investment with technical uncertainty

Jyh Bang Jou; Tan Lee

doi:10.1080/00036846.2010.498351

Mutually exclusive investment with technical uncertainty

Jyh Bang Jou, Tan Lee

Department of Finance

Research output: Contribution to journal › Article › peer-review

Abstract

A firm, which faces technical uncertainty as in Pindyck (1993) can choose between two mutually exclusive investment projects, Projects 1 and 2. The added option to exercise Project 2 makes the firm less likely to exercise Project 1. An increase in the degree of technical uncertainty, the investment rate or the investment value upon completion for Project 2 encourages the firm to exercise Project 2 by increasing the trigger level of the expected cost of Project 2. This, however, ambiguously affects the firm's incentive to exercise Project 1, as the firm would rather implement Project 1 (2) in a region where the expected cost of Project 2 is relatively high (low).

Original language	English
Pages (from-to)	4723-4728
Number of pages	6
Journal	Applied Economics
Volume	43
Issue number	30
DOIs	https://doi.org/10.1080/00036846.2010.498351
State	Published - Dec 2011

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title = "Mutually exclusive investment with technical uncertainty",

abstract = "A firm, which faces technical uncertainty as in Pindyck (1993) can choose between two mutually exclusive investment projects, Projects 1 and 2. The added option to exercise Project 2 makes the firm less likely to exercise Project 1. An increase in the degree of technical uncertainty, the investment rate or the investment value upon completion for Project 2 encourages the firm to exercise Project 2 by increasing the trigger level of the expected cost of Project 2. This, however, ambiguously affects the firm's incentive to exercise Project 1, as the firm would rather implement Project 1 (2) in a region where the expected cost of Project 2 is relatively high (low).",

author = "Jou, {Jyh Bang} and Tan Lee",

note = "Funding Information: We thank Professor Mark P. Taylor (the editor), and two anonymous referees for helpful comments. We also thank Hsien-Jung (Gary) Chung for providing research assistance. Financial support under grant no. NSC-97-2410-H-002-031 from the National Science Council, Executive Yuan, ROC, is gratefully acknowledged.",

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AU - Lee, Tan

N1 - Funding Information: We thank Professor Mark P. Taylor (the editor), and two anonymous referees for helpful comments. We also thank Hsien-Jung (Gary) Chung for providing research assistance. Financial support under grant no. NSC-97-2410-H-002-031 from the National Science Council, Executive Yuan, ROC, is gratefully acknowledged.

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N2 - A firm, which faces technical uncertainty as in Pindyck (1993) can choose between two mutually exclusive investment projects, Projects 1 and 2. The added option to exercise Project 2 makes the firm less likely to exercise Project 1. An increase in the degree of technical uncertainty, the investment rate or the investment value upon completion for Project 2 encourages the firm to exercise Project 2 by increasing the trigger level of the expected cost of Project 2. This, however, ambiguously affects the firm's incentive to exercise Project 1, as the firm would rather implement Project 1 (2) in a region where the expected cost of Project 2 is relatively high (low).

AB - A firm, which faces technical uncertainty as in Pindyck (1993) can choose between two mutually exclusive investment projects, Projects 1 and 2. The added option to exercise Project 2 makes the firm less likely to exercise Project 1. An increase in the degree of technical uncertainty, the investment rate or the investment value upon completion for Project 2 encourages the firm to exercise Project 2 by increasing the trigger level of the expected cost of Project 2. This, however, ambiguously affects the firm's incentive to exercise Project 1, as the firm would rather implement Project 1 (2) in a region where the expected cost of Project 2 is relatively high (low).

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DO - 10.1080/00036846.2010.498351

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VL - 43

SP - 4723

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JO - Applied Economics

JF - Applied Economics

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ER -

Mutually exclusive investment with technical uncertainty

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