Theory and Decision

, Volume 42, Issue 1, pp 37–51 | Cite as

RISK AND THE VALUE OF INFORMATION IN IRREVERSIBLE DECISIONS

  • Hans Gersbach

Abstract

The analysis of the nexus between the value of information and risk is examined for sequential decisions with different degrees of future commitment, as e.g. environmental decisions. We find that in the linear case a riskier environment in general will increase the value of information. This result will be extended in the separable case to decreasing and increasing stochastic returns to scale. An example shows the ambiguity in the general case.

Irreversibility flexibility value of information risk 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

REFERENCES

  1. Arrow, K.J. and Fisher, A.C.: 1974, 'Preservation, uncertainty and irreversibility', Quarterly Journal of Economics, 88, 312-319.Google Scholar
  2. Bernanke, B.S.: 1983, 'Irreversibility, uncertainty, and cyclical investment', Quarterly Journal of Economics, 98(1), 85-106.Google Scholar
  3. Freixas, X. and Laffont, J.J.: 1984, 'On the irreversibility effect', in: Kihlstrom, R.E. and Boyer, M. (Eds), Bayesian Models in Economic Theory, North Holland, Amsterdam, 105-114.Google Scholar
  4. Gould, J.P.: 1974, 'Risk, stochastic preference and the value of information', Journal of Economic Theory, 8, 64-84.Google Scholar
  5. Hanemann, W.M.: 1989, 'Information and the concept of option value', Journal of Environmental Economics and Management, 16, 23-37.Google Scholar
  6. Henry, C.: 1974, 'Investment decisions under uncertainty: The irreversibility effect', American Economic Review, 64, 1006-1012.Google Scholar
  7. Hess, J.: 1982, 'Risk and the gain from information', Journal of Economic Theory, 27, 231-238.Google Scholar
  8. Jones, R.A. and Ostroy, J.M.: 1984, 'Flexibility and uncertainty', Review of Economic Studies, 51, 13-32.Google Scholar
  9. Kreps, D.: 1977, 'A representation theorem for preference for flexibility', Econometrica, 47, 565-577.Google Scholar
  10. Marschak, J. and Radner, R.: 1972, Economic Theory of Teams, Yale University Press, New Haven.Google Scholar
  11. Murota, T.: 1988, 'Demand and supply values of information', Information Economics and Policy, 3, 25-34.Google Scholar
  12. Pindyck, R.S.: 1991, 'Irreversibility, uncertainty and investment', Journal of Economic Literature, 29(3), 1110-1148.Google Scholar
  13. Ramani, S.V. and Richard, A.: 1993, 'Decision, irreversibility and flexibility: the irreversibility effect reexamined', Theory and Decision, 35, 259-276.Google Scholar
  14. Rothschild, M. and Stiglitz, J.E.: 1970, 'Increasing Risk: I. A definition', Journal of Economic Theory, 3, 225-243.Google Scholar
  15. Viscusi, W.K.: 1988, 'Irreversible Environmental Investments with Uncertain Benefit Levels', Journal of Environmental Economics and Management, 15, 147-157.Google Scholar

Copyright information

© Kluwer Academic Publishers 1997

Authors and Affiliations

  • Hans Gersbach
    • 1
  1. 1.Alfred-Weber-InstitutHeidelbergGermany

Personalised recommendations