Abstract
The problem of the timing of an investment decision under partial information is analyzed in a framework where the firm is ambiguity averse. The analysis yields the description of a robust decision rule for an investment in a finite life project in presence of a stochastic instantaneous return. It is demonstrated that ambiguity aversion may accelerate investment in the short run. Ex post validation of the determined investment policy treats the impact of ambiguity aversion on the proper way of discounting of the profit flow resulting from the project and the fair price of risk associated with ambiguity aversion.
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Communicated by G. Leitmann.
We would like to thank Andrzej Skrzypacz, Hans Schumacher, Jacco Thijssen, and seminar participants at Trinity College Dublin, University of Ulm, the 10th Annual International Conference on Real Options, the Warsaw Economic Meeting 2006, and the 22nd Congress of European Economic Association for comments and suggestions. Financial support from the Flemish Science Foundation (F.W.O.) grant no. G.0374.04 is gratefully acknowledged.
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Trojanowska, M., Kort, P.M. The Worst Case for Real Options. J Optim Theory Appl 146, 709–734 (2010). https://doi.org/10.1007/s10957-010-9687-0
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DOI: https://doi.org/10.1007/s10957-010-9687-0