The impact of uncertainty on investment : overview
Author(s)
Advisor
Date
2009Publisher
Bilkent University
Language
English
Type
ThesisItem Usage Stats
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Abstract
Common consensus in the real option literature is that there is a
negative relationship between uncertainty and investment. One of the
explanations can be stated that the increased in uncertainty leads to move up
the value of waiting and consequently has an adverse effect on investment.
Contrary to the existing theory, Sarkar (2000) and Gryglewicz et all (2006)
find that this negative relationship is not always correct. The former paper
demonstrates that an increase in uncertainty can actually hasten the probability
of making an investment under certain condition (when project life is short and
level of uncertainty is low) and hence uncertainty has a positive effect on
investment. Result of the latter paper is exceptional in the sense that
uncertainty may accelerate irreversible investment without building on the
convexity of the marginal product of capital. In this thesis, we compare these
two papers and investigate whether they support each other or not in the
framework of real option theory. Moreover, we made some numerical
simulations in order to understand clearly impact of other variables on
investment along with uncertainty.