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Because of the uncertainties and irreversibilities that are often inherent in environmental degradation, its prevention, and its economic consequences, environmental policy design can involve important problems of timing. I use a simple two-period model to illustrate these optimal timing problems and their implications for environmental policy. I then lay(More)
Capital investment decisions must recognize the limitations on the firm's ability to later sell or expand capacity. This paper shows how opportunities for future expansion or contraction can be valued as options, how their valuation relates to the q theory of investment, and their effect on the incentive to invest. Generally, the option to expand reduces(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)
What is the likelihood that the U.S. will experience a devastating catastrophic event over the next few decades – something that would substantially reduce the capital stock, GDP and wealth? What does the possibility of such an event imply for the behavior of economic variables such as investment, interest rates, and equity prices? And how much should(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)
I examine risk/return trade-offs for environmental investments and their implications for policy choice. Consider a policy to reduce carbon emissions. To what extent should the policy objective be a reduction in the expected temperature increase versus a reduction in risk? Using a simple model of a stock externality that evolves stochastically, I examine(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)
We examine the technology and capacity choice problems of a multi-output firm facing stochastic demands. The firm can produce by installing output-specific capital, or, at greater cost, flexible capital that can be used to produce different outputs. Investment is irreversible, i.e., the firm cannot disinvest. The firm must decide how much of each type of(More)