Working Papers

Abstract

We define the irreversibility effect and demonstrate its importance in problems involving investment
decisions under uncertainty. We establish several analytical and numerical results that suggest both
that the effect holds more widely than generally recognized, and that an existing result (Epstein’s
Theorem) giving a sufficient condition for determining whether the effect holds can be applied more
widely than previously indicated, in particular to problems involving intertemporally nonseparable
benefit functions. We further show that a low elasticity of intertemporal substitution will however
result in failure of the effect, but that the effect will hold if the value of information increases in
the degree of flexibility.

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