Economic Theory

, Volume 28, Issue 2, pp 425–448 | Cite as

Irreversible investment in alternative projects

  • Jean-Paul Décamps
  • Thomas Mariotti
  • Stéphane Villeneuve
Article

Summary.

We study the problem of a risk-neutral decision-maker who has to choose among two alternative investment projects of different scales under output price uncertainty. We provide parameter restrictions under which the optimal investment strategy is not a trigger strategy and the optimal investment region is dichotomous. Whenever the decision-maker has the opportunity to switch from the smaller scale to the larger scale project, the dichotomy of the investment region can persist even when the volatility of the output price process becomes large.

Keywords and Phrases:

Investment under uncertainty Optimal stopping. 

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Copyright information

© Springer-Verlag Berlin/Heidelberg 2006

Authors and Affiliations

  • Jean-Paul Décamps
    • 1
  • Thomas Mariotti
    • 2
  • Stéphane Villeneuve
    • 3
  1. 1.GREMAQ-IDEIUniversité de Toulouse 1ToulouseFRANCE, and Europlace Institute of Finance
  2. 2.GREMAQ-IDEIUniversité de Toulouse 1ToulouseFRANCE,LSE, and CEPR
  3. 3.GREMAQUniversité de Toulouse 1ToulouseFRANCE

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