Skip to main content Accessibility help
×
×
Home

Investment, uncertainty, and production games

  • S. D. FLÅM (a1) and Y. M. ERMOLIEV (a2)
Abstract

This paper explores a few cooperative aspects of investments in uncertain, real options. By hypothesis some production commitments, factors, or quotas are transferable. Cases in point include energy supply, emission of pollutants, and harvest of renewable resources. Of particular interest are technologies or projects that provide anti-correlated returns. Any such project stabilizes the aggregate proceeds. Therefore, given widespread risk aversion, a project of this sort merits a bonus. The setting is formalized as a two-stage, stochastic, production game. Absent economies of scale, such games are quite tractable in analysis, computation, and realization. A core imputation comes in terms of shadow prices that equilibrate competitive, endogenous markets. Such prices emerge as optimal dual solutions to coordinated production programs, featuring pooled commitments, or resources. Alternatively, the prices could result from repeated exchange.

Copyright
References
Hide All
Abel, A.B., Dixit, A.K., Eberly, J.C., and Pindyck, R.S. (1996), ‘Options, the value of capital, and investment’, The Quarterly Journal of Economics 111: 753777.
Arrow, K.J. and Fisher, A.C. (1974), ‘Environmental preservation, uncertainty, and irreversibility’, The Quarterly Journal of Economics 88: 312319.
Arrow, K.J. and Lind, R.C. (1970), ‘Uncertainty and the evaluation of public investment decisions’, American Economic Review 60: 364378.
Borch, K.H. (1968), The Economics of Uncertainty, New Jersey: Princeton University Press.
Dixit, A. and Normann, V. (1982), Theory of International Trade, Cambridge University Press.
Dixit, A. and Pindyck, R.S. (1996), Investment under Uncertainty, Second Printing, New Jersey: Princeton University Press.
Dixit, A. and Pindyck, R.S. (2000), ‘Expendability, reversibility, and optimal capacity choice’, in Brennan, M.J. and Trigeorgis, L. (eds), Project Flexibility, Agency, and Competition: New Developments in the Theory and Application of Real Options, New York: Oxford University Press, pp. 5070.
Dixit, A., Pindyck, R.S., and Sødal, S. (1999), ‘A markup interpretation of optimal investment rules’, The Economic Journal 109: 179189.
Ermoliev, Y., Klaassen, G., and Nentjes, A. (1996), ‘Adaptive cost-effective ambient charges under incomplete information’, Journal of Environmental Economics and Management 31: 3748.
Ermoliev, Y., Michalevich, M., and Nentjes, A. (2000a), ‘Markets for tradeable emission and ambient permits: a dynamic approach’, Environmental and Resource Economics 15: 2956.
Ermoliev, Y., Keyzer, M.A., and Norkin, V. (2000b), ‘Global convergence of the stochastic tâtonnement process’, Journal of Mathematical Economics 34: 173190.
Evstigneev, I.V. and Flåm, S.D. (2001a), ‘Stochastic programming: nonanticipativity and Lagrange multipliers’, in Encyclopedia of Optimization, Kluwer.
Evstigneev, I.V. and Flåm, S.D. (2001b), ‘Sharing nonconvex cost’, Journal of Global Optimization 20: 257271.
Flåm, S.D. (2002), ‘Stochastic programming, cooperation and risk exchange’, Optimization Methods and Software 17: 493504.
Flåm, S.D. and Gassmann, H.I. (2006), ‘Pricing related projects’, in Marti, K., Ermoliev, Y., Makowski, M., and Pflug, G. (eds), Coping with Uncertainty, Lecture Notes in Economics and Mathematical Systems 581, Berlin: Springer.
Flåm, S.D. and Godal, O. (2007), ‘Market clearing and price formation’, Journal of Economic Dynamics and Control, forthcoming.
Goldman, S.M. and Starr, R.M. (1982), ‘Pairwise, t-wise, and Pareto optimalities’, Econometrica 50: 593666.
Gomory, R.E. (1995), ‘The known, the unknown and the unknowable’, Scientific American 272: 120210.
Henry, C. (1974), ‘The investment decision under uncertainty: the irreversibility effect’, The American Economic Review 64: 10061012.
Kolstad, C.D. and Guzman, R.M. (1999), ‘Information and the divergence between willingness to accept and willingness to pay’, Journal of Environmental Economics and Management 38: 6680.
Magill, M. and Quinzii, M. (1996), Theory of Incomplete Markets, Cambridge, MA: MIT Press.
Moulin, H. (1995), Cooperative Microeconomics: A Game-Theoretic Introduction, New Jersey: Princeton University Press.
Osborne, M.J. and Rubinstein, A. (1994), A Course in Game Theory, Cambridge, MA: MIT Press.
Owen, G. (1982), Game Theory, New York: Academic Press.
Pflug, G. Ch. (2004), ‘The value of perfect information as a risk measure’, in Marti, K., Ermoliev, Y., and Pflug, C. (eds), Dynamic Stochastic Optimization, Lecture Notes in Economics and Mathematical Systems 532: 275291, Berlin: Springer.
Rockafellar, R.T. and Uryasev, S. (2000), ‘Optimization of conditional value-at-risk’, Journal of Risk 2: 2141.
Rubinstein, A. and Wolinsky, A. (1990), ‘Decentralized trading, strategic behavior and the Walrasian outcome’, The Review of Economic Studies 57: 6378.
Shapley, L.S. and Shubik, M. (1969), ‘On market games’, Journal of Economic Theory 1: 925.
Wilson, R. (1968), ‘The theory of syndicates,’ Econometrica 36: 119132.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Environment and Development Economics
  • ISSN: 1355-770X
  • EISSN: 1469-4395
  • URL: /core/journals/environment-and-development-economics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed