Investment timing under political ambiguity

Welling, Andreas and Lukas, Elmar and Kupfer, Stefan (2015) Investment timing under political ambiguity. Journal of Business Economics, 85. 977–1010. ISSN 0044-2372

Abstract

In addition to economic risks, the economic success of investments often critically depends on the uncertain results of future political regime switches. Therefore, it is essential that policy makers, who design tax schemes or subsidy payments, understand the combined effects of risk and ambiguity on an investor’s investment behavior given subjective estimations and individual preferences. Using a practical example from the shipping industry, we set up a real options model that takes into account two sources of uncertainty, economic risk as well as political uncertainty regarding an imminent regime switch. We calculate the option value of the investment possibility subjectively estimated by the investor and derive the optimal investment-timing strategy. Furthermore, we analyze both the sole as well as the combined influence of economic risk, the investor’s subjective assessment of political risk and political ambiguity on both the option value and the investment-timing strategy.