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Mutually exclusive investment with technical uncertainty

Author

Listed:
  • Jyh-Bang Jou
  • Tan (Charlene) Lee
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).

Suggested Citation

  • Jyh-Bang Jou & Tan (Charlene) Lee, 2011. "Mutually exclusive investment with technical uncertainty," Applied Economics, Taylor & Francis Journals, vol. 43(30), pages 4723-4728.
    • Handle: RePEc:taf:applec:v:43:y:2011:i:30:p:4723-4728
    DOI: 10.1080/00036846.2010.498351
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    References listed on IDEAS

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