Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)
Lars Hegnes Sendstad
Sequential Investment in Emerging Technologies under Policy Uncertainty
() and Michail Chronopoulos
Abstract: Investment in emerging technologies is particularly
challenging, since, apart from uncertainty in revenue streams, firms must
also take into account both policy uncertainty and the random arrival of
innovations. We assume that the former is reflected in the sudden provision
and retraction of a support scheme, which takes the form of a fixed premium
on top of the output price. Thus, we develop an analytical framework for
sequential investment in order to determine how price, technological, and
policy uncertainty interact to affect the decision to invest sequentially
in successively improved versions of an emerging technology. We show that
greater likelihood of subsidy retraction lowers the incentive to invest,
whereas greater likelihood of subsidy provision facilitates investment.
However, embedded options to invest in improved technology versions raise
the value of the investment opportunity, thereby mitigating the impact of
subsidy retraction and making the impact of subsidy provision more
pronounced. Additionally, by allowing for sequential policy interventions,
we find that the impact of policy uncertainty becomes less pronounced as
the number of policy interventions increases.
Keywords: Investment analysis; real options; policy uncertainty; technological uncertainty; (follow links to similar papers)
JEL-Codes: G00; G11; (follow links to similar papers)
30 pages, June 14, 2016
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