TY - JOUR
T1 - The Impact of Operational Delay on Irreversible Investment under Knightian Uncertainty
AU - Delaney, Laura
PY - 2022/6
Y1 - 2022/6
N2 - Lags between investing in a venture and when it comes into operation have a significant effect on the operative capacity of a firm. However, with a few exceptions, such lags are ignored in the modelling of irreversible investment under uncertainty. In this paper I examine the impact such lags have on the optimal investment strategy of a firm in the context of Knightian uncertainty (KU) and an ambiguity-averse investor. I find the effect of such lags to be significant in this context and, for high enough levels of KU, its widely reported negative impact on the threshold is reversed entirely by the delay. Furthermore, when KU and lags are jointly incorporated into a problem of irreversible investment under uncertainty, volatility impacts the NPV from investing (in the absence of either, it has no impact).
AB - Lags between investing in a venture and when it comes into operation have a significant effect on the operative capacity of a firm. However, with a few exceptions, such lags are ignored in the modelling of irreversible investment under uncertainty. In this paper I examine the impact such lags have on the optimal investment strategy of a firm in the context of Knightian uncertainty (KU) and an ambiguity-averse investor. I find the effect of such lags to be significant in this context and, for high enough levels of KU, its widely reported negative impact on the threshold is reversed entirely by the delay. Furthermore, when KU and lags are jointly incorporated into a problem of irreversible investment under uncertainty, volatility impacts the NPV from investing (in the absence of either, it has no impact).
UR - http://www.scopus.com/inward/record.url?scp=85129258393&partnerID=8YFLogxK
U2 - 10.1016/j.econlet.2022.110494
DO - 10.1016/j.econlet.2022.110494
M3 - Article
SN - 0165-1765
VL - 215
JO - ECONOMICS LETTERS
JF - ECONOMICS LETTERS
M1 - 110494
ER -