Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-18T05:46:49.715Z Has data issue: false hasContentIssue false
  • English
  • Français

Investment, uncertainty, and production games

Published online by Cambridge University Press:  01 February 2009

S. D. FLÅM  and
Y. M. ERMOLIEV
S. D. FLÅM
Affiliation:
Economics Department, Bergen University, Norway. Email: sjur.flaam@econ.uib.no
Y. M. ERMOLIEV
Affiliation:
IIASA, Luxenburg, Austria. Email: ermoliev@iiasa.ac.at
Get access Rights & Permissions [Opens in a new window]

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.

Type
Research Article
Information
Environment and Development Economics , Volume 14 , Issue 1: GAME THEORY, NATURAL RESOURCES AND THE ENVIRONMENT , February 2009 , pp. 51 - 66
Copyright
Copyright © Cambridge University Press 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

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: 753–777.Google Scholar
Arrow, K.J. and Fisher, A.C. (1974), ‘Environmental preservation, uncertainty, and irreversibility’, The Quarterly Journal of Economics 88: 312–319.CrossRefGoogle Scholar
Arrow, K.J. and Lind, R.C. (1970), ‘Uncertainty and the evaluation of public investment decisions’, American Economic Review 60: 364–378.Google Scholar
Borch, K.H. (1968), The Economics of Uncertainty, New Jersey: Princeton University Press.Google Scholar
Dixit, A. and Normann, V. (1982), Theory of International Trade, Cambridge University Press.Google Scholar
Dixit, A. and Pindyck, R.S. (1996), Investment under Uncertainty, Second Printing, New Jersey: Princeton University Press.Google Scholar
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. 50–70.Google Scholar
Dixit, A., Pindyck, R.S., and Sødal, S. (1999), ‘A markup interpretation of optimal investment rules’, The Economic Journal 109: 179–189.CrossRefGoogle Scholar
Ermoliev, Y., Klaassen, G., and Nentjes, A. (1996), ‘Adaptive cost-effective ambient charges under incomplete information’, Journal of Environmental Economics and Management 31: 37–48.Google Scholar
Ermoliev, Y., Michalevich, M., and Nentjes, A. (2000a), ‘Markets for tradeable emission and ambient permits: a dynamic approach’, Environmental and Resource Economics 15: 29–56.Google Scholar
Ermoliev, Y., Keyzer, M.A., and Norkin, V. (2000b), ‘Global convergence of the stochastic tâtonnement process’, Journal of Mathematical Economics 34: 173–190.Google Scholar
Evstigneev, I.V. and Flåm, S.D. (2001a), ‘Stochastic programming: nonanticipativity and Lagrange multipliers’, in Encyclopedia of Optimization, Kluwer.Google Scholar
Evstigneev, I.V. and Flåm, S.D. (2001b), ‘Sharing nonconvex cost’, Journal of Global Optimization 20: 257–271.CrossRefGoogle Scholar
Flåm, S.D. (2002), ‘Stochastic programming, cooperation and risk exchange’, Optimization Methods and Software 17: 493–504.Google Scholar
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.Google Scholar
Flåm, S.D. and Godal, O. (2007), ‘Market clearing and price formation’, Journal of Economic Dynamics and Control, forthcoming.CrossRefGoogle Scholar
Goldman, S.M. and Starr, R.M. (1982), ‘Pairwise, t-wise, and Pareto optimalities’, Econometrica 50: 593–666.Google Scholar
Gomory, R.E. (1995), ‘The known, the unknown and the unknowable’, Scientific American 272: 120–210.Google Scholar
Henry, C. (1974), ‘The investment decision under uncertainty: the irreversibility effect’, The American Economic Review 64: 1006–1012.Google Scholar
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: 66–80.Google Scholar
Magill, M. and Quinzii, M. (1996), Theory of Incomplete Markets, Cambridge, MA: MIT Press.Google Scholar
Moulin, H. (1995), Cooperative Microeconomics: A Game-Theoretic Introduction, New Jersey: Princeton University Press.Google Scholar
Osborne, M.J. and Rubinstein, A. (1994), A Course in Game Theory, Cambridge, MA: MIT Press.Google Scholar
Owen, G. (1982), Game Theory, New York: Academic Press.Google Scholar
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: 275–291, Berlin: Springer.CrossRefGoogle Scholar
Rockafellar, R.T. and Uryasev, S. (2000), ‘Optimization of conditional value-at-risk’, Journal of Risk 2: 21–41.CrossRefGoogle Scholar
Rubinstein, A. and Wolinsky, A. (1990), ‘Decentralized trading, strategic behavior and the Walrasian outcome’, The Review of Economic Studies 57: 63–78.Google Scholar
Shapley, L.S. and Shubik, M. (1969), ‘On market games’, Journal of Economic Theory 1: 9–25.Google Scholar
Wilson, R. (1968), ‘The theory of syndicates,’ Econometrica 36: 119–132.CrossRefGoogle Scholar