Risk aversion and price uncertainty impact irreversible investments, affecting market dynamics.
The article explores how risk aversion and price uncertainty affect investment decisions. By considering risk averse investors without complete markets, the researchers find a critical output price that determines when it's best to invest. They use specific utility functions to analyze the impact of risk aversion and price uncertainty on investment choices. The study shows that risk aversion leads to less investment, especially for large investments. Additionally, higher price uncertainty makes delaying investments more valuable, especially for highly risk-averse individuals. The researchers also provide formulas for how risk-neutral investors are affected by these factors.