Optimal investment under ambiguous technology shocks

Takao Asano, Yusuke Osaki

Research output: Contribution to journalArticlepeer-review

Abstract

This paper analyzes the behavior of a firm facing an ambiguous technology shock and the effects of the attitude toward ambiguity on optimal capital investment using the smooth ambiguity model of Klibanoff et al. (2005). Although it seems intuitive that an increase in ambiguity aversion always reduces the optimal capital investment, this is not necessarily true because the shape of the production function plays a key role in determining the effect. Under some conditions, we show that the optimal amount of capital investment increases (decreases) in ambiguity aversion if the production function is substitute (complement), and that this result is counterintuitive when the production function is substitute. Furthermore, our main results hold if we assume the α-maxmin preferences in Ghirardato et al. (2004).

Original languageEnglish
Pages (from-to)304-311
Number of pages8
JournalEuropean Journal of Operational Research
Volume293
Issue number1
DOIs
Publication statusPublished - Aug 16 2021

Keywords

  • Capital investment
  • Decision analysis
  • Investment analysis
  • Smooth ambiguity model
  • Technology shock

ASJC Scopus subject areas

  • Computer Science(all)
  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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