Trigger Values of Non-Residential Structures and Equipment Investment
Recherches Economiques de Louvain, Vol. 63, No. 2, pp. 171-200, February 1997
30 Pages Posted: 1 Jun 2011
Date Written: Februay 20, 1997
Abstract
Trigger values are derived for investment projects that are affected by (i) uncertainty (according to Dixit and Pindyck, 1994) and (ii) construction periods (see Majd and Pindyck, 1987). The values are compared theoretically with trigger values for projects with rather certain returns, as well as with projects that can be obtained without long delays. Simulation results show the importance of the mixed effect of uncertainty and time-to-build on the decision to invest. Empirical results obtained with national (non-) residential structures and equipment data corroborate the importance of both aspects. The main conclusion is that time-to-build projects faced with uncertainty, like non-residential structures, seem to be affected disproportionally more than projects that do not have either of these aspects.
Keywords: uncertainty, irreversible investment, option, time-to-build
JEL Classification: C32, E22, G32
Suggested Citation: Suggested Citation