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.
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Received: 6 July 2004, Revised: 23 March 2005,
JEL Classification Numbers:
C61, D83.
Jean-Paul Décamps: Correspondence to
We would like to thank Marco A.G. Dias for many stimulating discussions. Financial support from FNS is gratefully acknowledged.
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Décamps, JP., Mariotti, T. & Villeneuve, S. Irreversible investment in alternative projects. Economic Theory 28, 425–448 (2006). https://doi.org/10.1007/s00199-005-0629-2
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DOI: https://doi.org/10.1007/s00199-005-0629-2