The impact of operational delay on irreversible investment under Knightian uncertainty

Lags between investing in a venture and when it comes into operation have a significant effect on the operative capacity of a firm. However, with a few exceptions, such lags are ignored in the modelling of irreversible investment under uncertainty. In this paper I examine the impact such lags have on the optimal investment strategy of a firm in the context of Knightian uncertainty (KU) and an ambiguityaverse investor. I find the effect of such lags to be significant in this context and, for high enough levels of KU, its widely reported negative impact on the threshold is reversed entirely by the delay. Furthermore, when KU and lags are jointly incorporated into a problem of irreversible investment under uncertainty, volatility impacts the NPV from investing (in the absence of either, it has no impact). Crown Copyright (c) 2022 Published by Elsevier B.V. All rights reserved.