City Research Online

Strategic Technology Switching under Risk Aversion and Uncertainty

Sendstad, L. H. and Chronopoulos, M. ORCID: 0000-0002-3858-2021 (2020). Strategic Technology Switching under Risk Aversion and Uncertainty. Journal of Economic Dynamics and Control, doi: 10.1016/j.jedc.2020.103918

Abstract

Firms devising green investment strategies within a deregulated environment must take into account not only economic and technological uncertainty, but also strategic interactions due to competition. Also, further complicating green investment decisions is the fact that firms are likely to exhibit risk aversion, since alternative energy technologies entail risk that cannot be diversified. Therefore, we develop a utility-based, real options framework for pre-emptive and non-pre-emptive competition in order to analyse how economic and technological uncertainty interact with risk aversion to impact the adoption of an existing technology in the light of uncertainty over the arrival of an improved version. We confirm that greater risk aversion delays investment and show that technological uncertainty accelerates the follower’s entry, delays the entry of the pre-emptive leader, and, intriguingly, does not affect the non-pre-emptive leader’s investment decision. Also, we show how the relative loss in the leader’s value due to the follower’s entry is affected by economic and technological uncertainty as well as risk aversion, and how the risk of pre-emption under increasing economic uncertainty raises the value of direct investment in the new technology relative to stepwise investment.

Publication Type: Article
Additional Information: This is an open access article under the CC BY license. (http://creativecommons.org/licenses/by/4.0/)
Publisher Keywords: Competition; Sequential investment; Technological uncertainty; Risk aversionReal options
Subjects: H Social Sciences > HB Economic Theory
T Technology
Departments: Business School > Actuarial Science & Insurance
Date Deposited: 19 Jun 2020 11:56
URI: https://openaccess.city.ac.uk/id/eprint/24267
[img]
Preview
Text - Accepted Version
Available under License Creative Commons Attribution.

Download (2MB) | Preview

Export

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login