Investments of Uncertain Cost

Abstract

I study irreversible investment decisions when projects take time to complete, and arc subject to two types of uncertainty uver the cost of completion.The first is technical uncertainty, i.e., uncertainty over the amount of time, effort, and materials that will ultimately be required to complete the project, and that is only resolved as the investment proceeds.The second is input cost uncertainty, ie., uncertainty over the prices and quantities of labor and materials required and which is external to the finn's investment activity.I derive a simple decision rule that maximizes the firm's value, and I use it to show how these two types of uncertainty have very diffcrent effects on investment decisions.As an example, I anaiyze the decision to start or continue building a nuclear power plant during the 1980's.

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