TY - JOUR
T1 - Irreversible investment and Knightian uncertainty
AU - Nishimura, Kiyohiko G.
AU - Ozaki, Hiroyuki
N1 - Funding Information:
The research reported here was conducted when the first author was a member of the Faculty of Economics of the University of Tokyo before joining the Policy Board of the Bank of Japan. This study was partially supported by a grant from the Economic and Social Research Institute, Cabinet Office, Government of Japan. However, the views expressed here are strictly personal and in no way represent those of the Bank of Japan, the Economic and Social Research Institute, the University of Tokyo, or Keio University. ∗ Corresponding author. Fax: +81 3 5427 1578. E-mail addresses: kiyohiko.nishimura@boj.or.jp (K.G. Nishimura), ozaki@econ.keio.ac.jp (H. Ozaki).
PY - 2007/9
Y1 - 2007/9
N2 - When firms make a decision about irreversible investment, they may not have complete confidence about their perceived probability measure describing future uncertainty. They may think other probability measures perturbed from the original one are also possible. Such uncertainty, characterized by not a single probability measure but a set of probability measures, is called "Knightian uncertainty." The effect of Knightian uncertainty on the value of irreversible investment opportunity is shown to be drastically different from that of traditional uncertainty in the form of risk. Specifically, an increase in Knightian uncertainty decreases the value of investment opportunity while an increase in risk increases it.
AB - When firms make a decision about irreversible investment, they may not have complete confidence about their perceived probability measure describing future uncertainty. They may think other probability measures perturbed from the original one are also possible. Such uncertainty, characterized by not a single probability measure but a set of probability measures, is called "Knightian uncertainty." The effect of Knightian uncertainty on the value of irreversible investment opportunity is shown to be drastically different from that of traditional uncertainty in the form of risk. Specifically, an increase in Knightian uncertainty decreases the value of investment opportunity while an increase in risk increases it.
KW - Irreversible investment
KW - Knightian uncertainty
KW - Optimal stopping
KW - Risk
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U2 - 10.1016/j.jet.2006.10.011
DO - 10.1016/j.jet.2006.10.011
M3 - Article
AN - SCOPUS:34548062866
SN - 0022-0531
VL - 136
SP - 668
EP - 694
JO - Journal of Economic Theory
JF - Journal of Economic Theory
IS - 1
ER -