Irreversible Investment of the Risk- and Uncertainty-averse DM
under k-Ignorance: The Role of BSDE

Zengwu Wang

In this paper, the approach of BSDE will be employed to study the irreversible investment problem under k-ignorance when the DM is risk- and uncertainty-averse. For the case of logarithmic utility, we work out the explicit solutions of the value of the utilized patent, the value of the unutilized patent, and the value of the reservation profit. Furthermore, in view of numerical method, the effects of the risk and the uncertainty on the above three parameters are analyzed. All the comparative static results are consistent with our intuition.

Key Words: Irreversible investment; k-ignorance; Risk; Uncertainty; Backward stochastic differential equation (BSDE in short); Conditional g-expectation.
JEL Classification Numbers: C61, G11, D81.