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    Heterogeneous Information and Investment under Uncertainty

    Ni, Shawn, 1962-
    Ratti, Ronald A.
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    [PDF] HeterogeneousInformationInvestmentUncertainty.pdf (551.5Kb)
    Date
    2007
    Format
    Working Paper
    Metadata
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    Abstract
    A sudden change in investment environment shifts objective uncertainty (characterized by parameters that determine the distribution of returns) and at the same time heightens subjective uncertainty (about the data generating parameters) unevenly across investors. For a given state of economy, the uncertainty facing the investor is the sum of the uncertainty in the data and the uncertainty of the investor's assessment of the expected return distribution. In this model the option value of waiting to invest depends not only on the objective uncertainty as in the traditional theory but varies systematically with investor information and Bayesian updating of outlook for the project. Simulation of the model suggests that during a state characterized by greater uncertainty and higher potential expected return investment will be by an abnormally high percentage of informed investors and may increase overall. For over 10,000 instances of firm-level FDI data for Korea from 1996 to 2001, regression results are consistent with the hypothesis that disproportionably more FDI is made by experienced (hence more informed) investors during heightened uncertainty.
    URI
    http://hdl.handle.net/10355/2567
    Part of
    Working papers (Department of Economics);WP 07-09
    Part of
    Economics publications
    Citation
    Department of Economics, 2007
    Rights
    OpenAccess.
    This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 License.
    Collections
    • Economics publications (MU)

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