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Real Options in a Ramsey style Growth Model
TLDR
In this article, the authors study the aggregate implications of microeconomic investment irreversibility and idiosyncratic uncertainty in a simple growth model by highlighting real option effects and endogenize the drift rate of real option by connecting it to the state of the economy.Abstract:
This paper studies the aggregate implications of microeconomic investment irreversibility and idiosyncratic uncertainty in a simple growth model by highlighting real option effects. We endogenize the drift rate of real option by connecting it to the state of the economy. Thereby, we extend the analysis of the optimal capital accumulation policy in the firm sector and show the different implications of idiosyncratic and aggregate uncertainty on growth dynamics.read more
References
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Book
Investment Under Uncertainty
Avinash Dixit,Robert S. Pindyck +1 more
TL;DR: In this article, Dixit and Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made.
Journal ArticleDOI
Investment Under Uncertainty
TL;DR: This article defined investment as the act of incurring an immediate cost in the expectation of future rewards, i.e., the payments it must make to extract itself from contractual commitments, including severance payments to labor, are the initial expenditure, and the prospective reward is the reduction in future losses.
Posted Content
The Impact of Uncertainty Shocks
TL;DR: In this paper, a model with a time varying second moment is proposed to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment, which occurs because higher uncertainty causes firms to temporarily pause their investment and hiring.
Journal ArticleDOI
The Value of Waiting to Invest
TL;DR: In this paper, the optimal timing of investment in an irreversible project where the benefits from the project and the investment cost follow continuous-time stochastic processes was studied, and an explicit formula for the value of the option to invest was derived, assuming that the option is valued by risk-averse investors who are well diversified.
Posted Content
The Value of Waiting to Invest
TL;DR: In this paper, the optimal timing of investment in an irreversible project where the benefits from the project and the investment cost follow continuous-time stochastic processes is studied, and the optimal time to invest and an explicit formula for the value of the option to invest are derived.
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