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A Note on Competitive Investment under Uncertainty

Robert S. Pindyck

August 1991

Robert S. Pindyck, August 1991

This paper clarifies how uncertainty affects irreversible investment in a competitive market equilibrium. With free entry, irreversibility affects the distribution of future prices, and thereby creates an opportunity cost of investing now rather than waiting. As with an imperfectly competitive firm, uncertainty can also increase the value of a marginal unit of capital. I show that with an infinite horizon, the opportunity cost is larger than this increase in value, so that uncertainty reduces investment.

 

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