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3947. Investment under Uncertainty: Abrupt Business Environment Changes and Time-to-Build
Invited abstract in session MB-33: Dynamics of the Firm I, stream Optimal Control Theory and Applications.
Monday, 10:30-12:00Room: 42 (building: 303A)
Authors (first author is the speaker)
| 1. | Nathan Bun
|
| Econometrics and Operations Research, Tilburg University | |
| 2. | Kuno Huisman
|
| Tilburg University | |
| 3. | Peter Kort
|
| Tilburg University |
Abstract
Recent geopolitical factors have a considerable effect on the economic environment of firms. We study abrupt business environment changes that affect demand growth and demand uncertainty in combination with time-to-build in a dynamic investment model of the firm. The business environment can either be a regime of relative prosperity or a regime of geopolitical turmoil. The firm has to decide on the timing and size of the investment. We find that time-to-build by itself does not affect the size and only delays the investment resulting in a constant project value at the moment of the investment. Time-to-build also does not affect the size greatly if regime shifts are included. The effect of the shift rates on the investment decision is twofold. The firm prioritizes the current regime in the investment decision if the probabilities of regime shifts occurring are small. If the probabilities of regime shifts occurring are large, the firm invests based on the weighted average of the two regimes.
Keywords
- Decision Analysis
- Optimization in Financial Mathematics
- Programming, Stochastic
Status: accepted
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