Investment and uncertainty with time to build: Evidence from entry into U.S. copper mining

The standard real-options model predicts that increased uncertainty discourages investment. When projects are large and take time to build, however, that prediction can be reversed. We investigate the investment/uncertainty relationship empirically using historical data on opening dates of new U.S....

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Bibliographic Details
Published in:Journal of economic dynamics & control 2018-10, Vol.95, p.233-254
Main Authors: Marmer, Vadim, Slade, Margaret E.
Format: Article
Language:English
Subjects:
Copper mining
Entry
Investment
Real options
Structural estimation
Uncertainty
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Summary:The standard real-options model predicts that increased uncertainty discourages investment. When projects are large and take time to build, however, that prediction can be reversed. We investigate the investment/uncertainty relationship empirically using historical data on opening dates of new U.S. copper mines – large, irreversible projects with substantial construction lags. Both the timing of the decision to go forward and the price thresholds that trigger that decision are assessed. In particular, we build upon a reduced form analysis to construct a structural model of entry. We find that, in this market, greater uncertainty encourages investment and lowers the price thresholds for many mines.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2018.09.001