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Economics defines investment as the act of incurring an immediate cost in the expectation of future rewards. Firms that construct plants and install equipment, merchants who lay in a stock of goods for sale, and persons who spend time on vocational education are all investors in this sense. Somewhat less obviously, a firm that shuts down a loss-making plant(More)
I examine the long-run behavior of oil, coal, and natural gas prices, using up to 127 years of data, and address the following questions: What does over a century of data tell us about the stochastic dynamics of price evolution, and how it should be modeled? Can models of reversion to stochastically fluctuating trend lines help us forecast prices over(More)
I study irreversible investment decisions when projects take time to complete, and are subject to two types of uncertainty over the cost of completion. The first is technical uncertainty, i.e., uncertainty over the amount of time, effort, and materials that will ultimately be required to complete the project, and that is only resolved as the investment(More)
Commodity prices are volatile, and volatility itself varies over time. Changes in volatility can affect market variables by directly affecting the marginal value of storage, and by affecting a component of the total marginal cost of production, the opportunity cost of producing the commodity now rather than waiting for more price information. I examine the(More)
We reexamine the basic investment problem of deciding when to incur a sunk cost to obtain a stochastically fluctuating benefit. The optimal investment rule satisfies a trade-off between a larger versus a later net benefit; we show that this trade-off is closely analogous to the standard trade-off for the pricing decision of a firm that faces a downward(More)
In a world of certainty, the design of environmental policy is relatively straightforward, and boils down to maximizing the present value of the flow of social benefits minus costs. But the real world is one of considerable uncertainty – over the physical and ecological impact of pollution, over the economic costs and benefits of reducing it, and over the(More)
for helpful discussions. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. ABSTRACT The regulation of telecommunications, railroads, and other network industries has been based on mandatory unbundling and facilities sharing-entrants have the option to lease part or all(More)