WatRISQ Seminar by Professor Motoh Tsujimura of the University of Doshisha University, JapanExport this event to calendar

Tuesday, March 1, 2016 — 4:00 PM EST

Assessing Capital Investment Strategy under Ambiguity

The uncertainty of the business environment is increasing more and more. Firms’ managers face complex business environments and the difficulty of predicting likely future outcomes. How they treat uncertainty is important in business decision making, such as investing in capital stock. In this paper, we consider a firm’s investment problem under uncertainty. In particular, we focus on a certain type of uncertainty to incorporate the unpredictable business environment. We consider the firm’s investment problem under ambiguity, which is also termed Knightian uncertainty. The probability of an outcome is not uniquely determined under ambiguity or Knightian uncertainty (Knight, 1921).

Suppose that a firm produces a single output and sells it in a market. The firm’s problem is to decide the production capital investment rate to maximize its profit as  in  Abel  and Eberly (1997). Investing in the capital requires a quadratic-type adjustment cost in addition to the purchase price, which  is  assumed  to  be  constant.  In this paper, we consider the case in which the firm’s  manager  cannot  predict  the  future  price  of  the  output  precisely. To be more precise, he cannot uniquely identify the probability distribution  of  the  output price.  Then, he has to determine the investment strategy  under  output  price  ambiguity. In Abel and Eberly (1997), the firm’s manager can uniquely identify the distribution  of the output  price.  This paper is an extension of the research of Abel and Eberly  (1997) by incorporating ambiguity. In order to reflect the misspecification of the model, we use robust control techniques developed by Hansen and  Sargent  (2001),  Hansen  et  al.  (2002), and Hansenet al. (2006). These techniques are based on the multiple priors framework by Gilboa and Schmeidler (1989). We formulate the firm’s problem as a robust control problem and  show  that  the  equation  derives  the  optimal  investment  strategy.  This research is based on joint work with Junich Imai.


About the speaker

Motoh Tsujimura is Associate Professor of Operations Research in the Faculty of Commerce, Doshisha University, Japan. His research interests include real options, environmental policy under uncertainty, natural resource management problems under uncertainty and payout policy. Motoh Tsujimura has a PhD in Economics from Osaka University.

Location 
DC - William G. Davis Computer Research Centre
Room 1304
200 University Avenue West

Waterloo, ON N2L 3G1
Canada

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