Irreversible Investment Under Uncertainty in General Equilibrium
This paper considers the decision of irreversible investment under macroeconomic uncertainty in a general equilibrium framework. Uncertainty thus affects the optimal decision through two different transmission channels. The first one is the irreversibility and the second one is the agents’ preferences. The partial equilibrium counterpart of our model would have exhibited the standard negative relationship between uncertainty and the desired level of capital. We show that extending the analysis to a general equilibrium framework may reverse this relationship.
KeywordsRisk Aversion Capital Stock Energy Price Market Imperfection Relative Risk Aversion
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