Investment and Uncertainty with Time to Build: Evidence from U.S. Copper Mining
69 Pages Posted: 28 Dec 2016
Date Written: December 27, 2016
The standard real-options model predicts that increased uncertainty discourages investment. When projects are large and take time to build, however, this prediction can be reversed. We investigate the investment/uncertainty relationship empirically using historical data on opening dates of new U.S. copper mines - large, irreversible projects with substantial construction lags. Both the timing of the decision to go forward and the price thresholds that trigger that decision are assessed. We find that, in this market, greater uncertainty encourages investment and lowers the price thresholds for many mines.
Keywords: Investment, Uncertainty, Real options, Copper mining, Exhaustible resources
JEL Classification: G11, L72, Q39
Suggested Citation: Suggested Citation