Irreversible Investment, Uncertainty and Ambiguity: The Case of the Bioenergy Sector
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We analyse the decision of an agent to invest and engage in industrial activities that are
characterized by two forms of uncertainty: market size uncertainty and competitive effect
uncertainty. We apply our model on the bioenergy industries. We compare the case of an ambiguity
neutral agent with that of an ambiguity adverse agent. We show that the investment decision of an
agent depends on the effects of both the capital investment and the level of production on the cost
and the uncertainty the agent is confronted with. Moreover, we find that ambiguity aversion tends
to decrease the agent's optimal levels of production and investment. Our numerical analysis of the
French case illustrates the different effects associated with market size uncertainty and competitive
effect uncertainty.