October  2020, 7(4): 317-333. doi: 10.3934/jdg.2020025

Real option value and poverty trap

1. 

Università di Urbino Carlo Bo, Dipartimento di Economia Società Politica - DESP, Via Saffi 42 61029 Urbino (PU), Italy

2. 

Università di Urbino Carlo Bo, Dipartimento di Economia Società Politica - DESP

*Corresponding author: Giuseppe Travaglini

Received  April 2020 Revised  June 2020 Published  October 2020 Early access  August 2020

In recent years concerns about poverty traps have risen to the forefront of policy. Accordingly, the decision on investing or waiting in specific sectors or locations of poor countries is in part assigned to the government of that country. We study the optimal timing of a foreign direct investment (FDI) where the returns are stochastic and the cost irreversible. A model of real option value compares the benefits and costs of a risky FDI with those of a riskless official development assistance (ODA). Once FDIs take place, the local government can shift ODAs towards different sectors or locations to hinder poverty. We show that with uncertainty and irreversibility, the policy decision has an opportunity value that must be included as a part of the full value of the FDI. This option value is highly sensitive to uncertainty over the future returns, so that changing actual economic conditions in poor countries can have a large impact on the poverty trap. Simulations show that this option value can be significant to explain the prevalence of hysteresis, that is the tendency of a poor country to persist in poverty.

Citation: Giorgio Calcagnini, Edgar J. Sanchez Carrera, Giuseppe Travaglini. Real option value and poverty trap. Journal of Dynamics and Games, 2020, 7 (4) : 317-333. doi: 10.3934/jdg.2020025
References:
[1]

E. Accinelli and E. S. Carrera, Strategic complementarities between innovative firms and skilled workers: The poverty trap and the policymaker's intervention, Structural Change and Economic Dynamics, 22 (2011), 30-40.  doi: 10.1016/j.strueco.2010.11.004.

[2]

P. R. Agénor and J. Aizenman, Aid volatility and poverty traps, J. Develop. Econom., 91 (2010), 1-7. 

[3]

C. Altomonte, Economic determinants and institutional frameworks: FDI in economies in transition, Transnational Corporations, 9 (2000), 75-106. 

[4]

A. Assadzadeh and J. Pourqoly, The relationship between foreign direct investment, institutional quality and poverty: Case of MENA countries, J. Econom., 1 (2013), 161-165. 

[5]

C. Azariadis and A. Drazen, Threshold externalities in economic development, Quart. J. Econom., 2 (1990), 501-526. 

[6]

C. Azariadis, The economics of poverty traps; Part one: Complete markets, J. Econom. Growth, 4 (1996), 449-486. 

[7]

C. Azariadis and J. Stachurski, Poverty traps, Handbook of Economic Growth, 1 (2005), 295-384.  doi: 10.1016/S1574-0684(05)01005-1.

[8]

C. Azariadis, The theory of poverty trap: What have we learned?, in Poverty Traps, 1, Princeton, Princeton University Press, 2006, 17–40.

[9]

A. Banerjee and A. Newman, Occupational choice and the process of development, J. Polit. Econ., 101 (1993), 274-298. 

[10]

A. Banerjee and E. Duflo, Poor economics: A radical rethinking of the way to fight global poverty, 2$^{nd}$ edition, PublicAffairs, 2011.

[11]

B. J. BarnettC. B. Barrett and J. R. Skees, Poverty traps and index-based risk transfer products, World Development, 36 (2008), 1766-1785. 

[12]

C. B. Barrett and B. M. Swallow, Fractal poverty traps, World Development, 34 (2006), 1-15. 

[13]

C. B. Barrett and M. R. Carter, The economics of poverty traps and persistent poverty: Empirical and policy implications, J. Develop. Stud., 49 (2013), 976-90. 

[14]

C. B. BarrettT. Garg and L. McBride, Well-being dynamics and poverty traps, Ann. Rev. Res. Econom., 8 (2016), 303-327. 

[15]

Y. Basnett, J. Engel, J. Kennan, C. Kingombe, I. Massa and D. W. te Velde, Increasing the effectiveness of aid for trade: The circumstances under which it works best, London: Overseas Develop. Instit., (2012), Working Paper 353.

[16]

S. Bowles, Institutional poverty traps, in Poverty Traps, 5 pp. 116-138, Princeton University Press, 2006.

[17]

C. Burnside and D. Dollar, Aid, policies, and growth, Amer. Econom. Rev., 90 (2009), 847-868. 

[18]

G. Calvo, Servicing the public debt: The role of expectations, Amer. Econom. Rev., 78 (1998), 647-661. 

[19]

M. R. CarterP. D. LittleT. Mogues and W. Negatu, Poverty traps and natural disasters in Ethiopia and Honduras, World Development, 35 (2007), 835-856. 

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Y. Chen and M. Funke, Option value, policy uncertainty, and the foreign direct investment decision, HWWA Discussion Paper, 234 (2003).

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H. Cole and T. Kehoe, Self-fulfilling debt crises, Rev. Econom. Stud., 67 (2000), 91-116. 

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P. Collier and D. Dollar, Can the world cut poverty in half? How policy reform and effective aid can meet intrenational development goals, World Development, 29 (2001), 1787-1802. 

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P. Collier and D. Dollar, Aid allocation and poverty reduction, Eur. Econom. Rev., 46 (2002), 1475-1500. 

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R. Cooper and A. John, Coordinating coordination failures in Keynesian models, Quart. J. Econom., 103 (1998), 441-463.  doi: 10.2307/1885539.

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L. Chauvet and P. Guillaumont, Aid and performance: A reassessment, J. Develop. Stud., 37 (2001), 6-92. 

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L. Chauvet and P. Guillaumont, Aid, volatility and growth again: When aid volatility matters and when it does not, Rev. Develop. Econom., 13 (2009), 452-463.  doi: 10.1111/j.1467-9361.2009.00501.x.

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D. Chivers, Success, survive or escape? Aspirations and poverty traps, J. Econom. Behav. Organ., 143 (2017), 116-132. 

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C. J. DalgaardH. Hansen and F. Tarp, On the empirics of foreign aid and growth, Econom. J., 114 (2004), 191-216.  doi: 10.1111/j.1468-0297.2004.00219.x.

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A. De Matteis, Relevance of poverty and governance for aid allocation, Rev. Develop. Finan., 3 (2013), 51-60. 

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J. De Melo and L. Wagner, Aid for trade as finance for the poor, Development (No. 125), 2015.

[31]

D. Diamond and P. Dybvig, Bank Runs, Deposit Insurance, and Liquidity, J. Polit. Econ., 91 (1983), 401-419. 

[32]

A. Dixit, Investment and hysteresis, J. Econom. Perspective, 6 (1992), 107-132.  doi: 10.1257/jep.6.1.107.

[33] A. Dixit and R. S. Pindyck, Investment under Uncertainty, Princeton University Press, New Jersey, 1994. 
[34]

S. Durlauf, A theory of persistent income inequality, J. Econom. Growth, 1 (1996), 75-93. 

[35]

S. Durlauf, Neighborhood effects, Handbook of Regional and Urban Economics, 4 (2003).

[36]

W. Easterly, Can foreign aid buy growth, Journal of Economic Perspectives, 17 (2003), 23-48.  doi: 10.1257/089533003769204344.

[37]

W. EasterlyR. Levine and D. Roodman, Aid, policies and growth: Comment, Amer. Econom. Rev., 94 (2004), 774-780.  doi: 10.1257/0002828041464560.

[38]

R. Echandi, J. Krajcovicova and C. Z. Qiang, The impact of investment policy in a changing global economy: A review of the literature, The World Bank, Policy Research Working Paper 7437, 2015.

[39]

M. Fujita, P. Krugman and A. J. Venables, The Spatial Economy; Cities, Regions and International Trade, Cambridge: MIT Press, 1999. doi: 10.7551/mitpress/6389.001.0001.

[40]

A. D. Foster and M. R. Rosenzweig, Household division and rural economic growth, Rev. Econom. Stud., 69 (2002), 839-869. 

[41]

O. Galor and J. Zeira, Income distribution and macroeconomics, Rev. Econom. Stud., 60 (1993), 35-52.  doi: 10.2307/2297811.

[42]

M. Ghatak, Theories of poverty traps and anti-poverty policies, World Bank Econom. Rev., (2015), 1–29.

[43]

R. Jenkins, Globalization, corporate social responsibility and poverty, International Affairs, 81 (2005), 525-540.  doi: 10.1111/j.1468-2346.2005.00467.x.

[44]

S. Kosack, Effective aid: How democracy allows development aid to improve the quality of life, World Development, 31 (2003), 1-22. 

[45]

H. Hansen and F. Tarp, Aid and Growth Regressions, J. Develop. Econom., 64 (2001), 547-570.  doi: 10.1016/S0304-3878(00)00150-4.

[46]

G. Holger and D. Greenaway, Foreign direct investment and intra-industry spillovers: A review of the literature, No. (2001), 37. Research Paper.

[47]

G. Holger and D. Greenaway., Much ado about nothing? Do domestic firms really benefit from foreign direct investment?, The World Bank Research Observer 19.2, (2004), 171–197.

[48]

M. Ikegami, M. R. Carter, C. B. Barrett and S. Janzen, Poverty traps and the social protection paradox", NBER Chapters, in The Economics of Poverty Traps National Bureau of in The Economics of Poverty Traps, University of Chicago Press.

[49]

A. Kraay and D. McKenzie, Do Poverty Traps Exist? Assessing the Evidence, J. Econom. Perspectives, 28 (2014), 127-148.  doi: 10.1257/jep.28.3.127.

[50]

P. Krugman, Increasing returns and economic geography, J. Polit. Econ., 99 (1991), 483-499.  doi: 10.1086/261763.

[51]

M. Katz and C. Shapiro, Technology adoption in the presence of network externalities, J. Polit. Econ., 94 (1986), 822-841.  doi: 10.1086/261409.

[52]

P. T. Leeson, Escaping poverty: Foreign aid, private property, and economic development, The Journal of Private Enterprise, 23 (2008), 39-64. 

[53]

E. M. Liu and J. K. Huang, Risk preferences and pesticide use by cotton farmers in China, J. Develop. Econom., 103 (2013), 202-215. 

[54]

G. C. Loury, Intergenerational transfers and the distribution of earnings, Econometrica, 49 (1981), 843-867.  doi: 10.2307/1912506.

[55]

R. E. Lucas Jr., On the Mechanics of Economic Development, J. Monetary Econom., 22 (1988), 3-42.  doi: 10.1016/0022-0531(77)90108-9.

[56]

K. Matsuyama, Poverty traps, in The New Palgrave Dictionary of Economics, New York: Palgrave Macmillan, 2008.

[57]

R. McDonald and D. Siegel, The value of waiting to invest, Quart. J. Econom., 101 (1986), 707-728.  doi: 10.2307/1884175.

[58]

D. Moyo, Dead Aid: Why Aid is not Working and How there is a Better Way for Africa, Macmillan, 2009.

[59]

M. Obstfeld, Rational and Self-Fulfilling Balance-of-Payments Crises, Amer. Econom. Rev., 76 (1986), 72-81. 

[60]

M. Obstfeld, Models of currency crises with self-fulfilling features, Eur. Econom. Rev., 40 (1996), 1037-1047.  doi: 10.1016/0014-2921(95)00111-5.

[61]

OECD/WTO, Aid for trade at a glance 2011: Showing results, WTO, Geneva/OECD Publishing, Paris, 2011.

[62]

OECD, Development co-operation report, Paris: OECD, 2018. doi: 10.1787/dcr-2018-en.

[63]

R. Pindyck, Irreversibility, uncertainty and investment, J. Econom. Lit., 29 (1991), 1110-1148. 

[64]

V. Polterovich, Institutional Trap, in The New Palgrave Dictionary of Economics, London, Palgrave Macmillan, 2008. doi: 10.1057/978-1-349-95121-5_2717-1.

[65]

R. G. Rajan and A. Subramanian, Aid, Dutch disease, and manufacturing growth, J. Develop. Econom., 94 (2011), 106-118. 

[66]

P. Rivoli and E. Salorio, Foreign direct investment and investment under uncertainty, J. Internat. Bus. Stud., 27 (1996), 335-357.  doi: 10.1057/palgrave.jibs.8490138.

[67]

P. M. Romer, Increasing returns and long-run growth, J. Polit. Econ., 94 (1986), 1002-1037. 

[68]

J. Sachs, The End of Poverty: Economic Possibilities for Our Time, The Penguin Press: New York, 2005.

[69]

E. Saltari and G. Travaglini, The effects of environmental policies on the abatement investment decisions of a green firm, Resource and Energy Economics, 33 (2011), 666-685.  doi: 10.1016/j.reseneeco.2011.02.001.

[70]

E. Sanchez Carrera, Evolutionary dynamics of poverty traps, J. Evol. Econom., 96 (2018), 611–630. doi: 10.1007/s00191-018-0575-3.

[71]

P. Santos and C. Barrett, Persistent poverty and informal credit, J. Develop. Econom., 96 (2011), 337-347.  doi: 10.1016/j.jdeveco.2010.08.017.

[72]

D. StockemerB. LaMontagne and J. Charrette, Panacea, placebo, or poison? The impact of development aid on growth. Canadian, J. Develop. Stud., 32 (2011), 3-16.  doi: 10.1080/02255189.2011.576133.

[73]

A. Verschoor and A. Kalwij, Aid, social policies and pro-poor growth, J. Internat. Develop., 18 (2006), 519-532.  doi: 10.1002/jid.1248.

[74]

F. M. VieiderP. MartinssonP. K. Nam and N. Truong, Risk preferences and development revisited, Theory and Decision, 86 (2019), 1-21.  doi: 10.1007/s11238-018-9674-8.

[75]

World Bank Group, Global Investment Competitiveness Report 2017/2018: Foreign Investor Perspectives and Policy Implications, Washington, DC, World Bank, 2018. doi: 10.3982/QE300.

[76]

J. Y. Wu and C. Hsu, Foreign direct investment and income inequality: Does the relationship vary with absorptive capacity?, Economic Modelling, 29 (2012), 2183-2189.  doi: 10.1016/j.econmod.2012.06.013.

[77]

F. J. Zimmerman and M. R. Carter, Asset smoothing, consumption smoothing and the reproduction of inequality under risk and subsistence constraints, J. Develop. Econom., 71 (2003), 233-260. 

show all references

References:
[1]

E. Accinelli and E. S. Carrera, Strategic complementarities between innovative firms and skilled workers: The poverty trap and the policymaker's intervention, Structural Change and Economic Dynamics, 22 (2011), 30-40.  doi: 10.1016/j.strueco.2010.11.004.

[2]

P. R. Agénor and J. Aizenman, Aid volatility and poverty traps, J. Develop. Econom., 91 (2010), 1-7. 

[3]

C. Altomonte, Economic determinants and institutional frameworks: FDI in economies in transition, Transnational Corporations, 9 (2000), 75-106. 

[4]

A. Assadzadeh and J. Pourqoly, The relationship between foreign direct investment, institutional quality and poverty: Case of MENA countries, J. Econom., 1 (2013), 161-165. 

[5]

C. Azariadis and A. Drazen, Threshold externalities in economic development, Quart. J. Econom., 2 (1990), 501-526. 

[6]

C. Azariadis, The economics of poverty traps; Part one: Complete markets, J. Econom. Growth, 4 (1996), 449-486. 

[7]

C. Azariadis and J. Stachurski, Poverty traps, Handbook of Economic Growth, 1 (2005), 295-384.  doi: 10.1016/S1574-0684(05)01005-1.

[8]

C. Azariadis, The theory of poverty trap: What have we learned?, in Poverty Traps, 1, Princeton, Princeton University Press, 2006, 17–40.

[9]

A. Banerjee and A. Newman, Occupational choice and the process of development, J. Polit. Econ., 101 (1993), 274-298. 

[10]

A. Banerjee and E. Duflo, Poor economics: A radical rethinking of the way to fight global poverty, 2$^{nd}$ edition, PublicAffairs, 2011.

[11]

B. J. BarnettC. B. Barrett and J. R. Skees, Poverty traps and index-based risk transfer products, World Development, 36 (2008), 1766-1785. 

[12]

C. B. Barrett and B. M. Swallow, Fractal poverty traps, World Development, 34 (2006), 1-15. 

[13]

C. B. Barrett and M. R. Carter, The economics of poverty traps and persistent poverty: Empirical and policy implications, J. Develop. Stud., 49 (2013), 976-90. 

[14]

C. B. BarrettT. Garg and L. McBride, Well-being dynamics and poverty traps, Ann. Rev. Res. Econom., 8 (2016), 303-327. 

[15]

Y. Basnett, J. Engel, J. Kennan, C. Kingombe, I. Massa and D. W. te Velde, Increasing the effectiveness of aid for trade: The circumstances under which it works best, London: Overseas Develop. Instit., (2012), Working Paper 353.

[16]

S. Bowles, Institutional poverty traps, in Poverty Traps, 5 pp. 116-138, Princeton University Press, 2006.

[17]

C. Burnside and D. Dollar, Aid, policies, and growth, Amer. Econom. Rev., 90 (2009), 847-868. 

[18]

G. Calvo, Servicing the public debt: The role of expectations, Amer. Econom. Rev., 78 (1998), 647-661. 

[19]

M. R. CarterP. D. LittleT. Mogues and W. Negatu, Poverty traps and natural disasters in Ethiopia and Honduras, World Development, 35 (2007), 835-856. 

[20]

Y. Chen and M. Funke, Option value, policy uncertainty, and the foreign direct investment decision, HWWA Discussion Paper, 234 (2003).

[21]

H. Cole and T. Kehoe, Self-fulfilling debt crises, Rev. Econom. Stud., 67 (2000), 91-116. 

[22]

P. Collier and D. Dollar, Can the world cut poverty in half? How policy reform and effective aid can meet intrenational development goals, World Development, 29 (2001), 1787-1802. 

[23]

P. Collier and D. Dollar, Aid allocation and poverty reduction, Eur. Econom. Rev., 46 (2002), 1475-1500. 

[24]

R. Cooper and A. John, Coordinating coordination failures in Keynesian models, Quart. J. Econom., 103 (1998), 441-463.  doi: 10.2307/1885539.

[25]

L. Chauvet and P. Guillaumont, Aid and performance: A reassessment, J. Develop. Stud., 37 (2001), 6-92. 

[26]

L. Chauvet and P. Guillaumont, Aid, volatility and growth again: When aid volatility matters and when it does not, Rev. Develop. Econom., 13 (2009), 452-463.  doi: 10.1111/j.1467-9361.2009.00501.x.

[27]

D. Chivers, Success, survive or escape? Aspirations and poverty traps, J. Econom. Behav. Organ., 143 (2017), 116-132. 

[28]

C. J. DalgaardH. Hansen and F. Tarp, On the empirics of foreign aid and growth, Econom. J., 114 (2004), 191-216.  doi: 10.1111/j.1468-0297.2004.00219.x.

[29]

A. De Matteis, Relevance of poverty and governance for aid allocation, Rev. Develop. Finan., 3 (2013), 51-60. 

[30]

J. De Melo and L. Wagner, Aid for trade as finance for the poor, Development (No. 125), 2015.

[31]

D. Diamond and P. Dybvig, Bank Runs, Deposit Insurance, and Liquidity, J. Polit. Econ., 91 (1983), 401-419. 

[32]

A. Dixit, Investment and hysteresis, J. Econom. Perspective, 6 (1992), 107-132.  doi: 10.1257/jep.6.1.107.

[33] A. Dixit and R. S. Pindyck, Investment under Uncertainty, Princeton University Press, New Jersey, 1994. 
[34]

S. Durlauf, A theory of persistent income inequality, J. Econom. Growth, 1 (1996), 75-93. 

[35]

S. Durlauf, Neighborhood effects, Handbook of Regional and Urban Economics, 4 (2003).

[36]

W. Easterly, Can foreign aid buy growth, Journal of Economic Perspectives, 17 (2003), 23-48.  doi: 10.1257/089533003769204344.

[37]

W. EasterlyR. Levine and D. Roodman, Aid, policies and growth: Comment, Amer. Econom. Rev., 94 (2004), 774-780.  doi: 10.1257/0002828041464560.

[38]

R. Echandi, J. Krajcovicova and C. Z. Qiang, The impact of investment policy in a changing global economy: A review of the literature, The World Bank, Policy Research Working Paper 7437, 2015.

[39]

M. Fujita, P. Krugman and A. J. Venables, The Spatial Economy; Cities, Regions and International Trade, Cambridge: MIT Press, 1999. doi: 10.7551/mitpress/6389.001.0001.

[40]

A. D. Foster and M. R. Rosenzweig, Household division and rural economic growth, Rev. Econom. Stud., 69 (2002), 839-869. 

[41]

O. Galor and J. Zeira, Income distribution and macroeconomics, Rev. Econom. Stud., 60 (1993), 35-52.  doi: 10.2307/2297811.

[42]

M. Ghatak, Theories of poverty traps and anti-poverty policies, World Bank Econom. Rev., (2015), 1–29.

[43]

R. Jenkins, Globalization, corporate social responsibility and poverty, International Affairs, 81 (2005), 525-540.  doi: 10.1111/j.1468-2346.2005.00467.x.

[44]

S. Kosack, Effective aid: How democracy allows development aid to improve the quality of life, World Development, 31 (2003), 1-22. 

[45]

H. Hansen and F. Tarp, Aid and Growth Regressions, J. Develop. Econom., 64 (2001), 547-570.  doi: 10.1016/S0304-3878(00)00150-4.

[46]

G. Holger and D. Greenaway, Foreign direct investment and intra-industry spillovers: A review of the literature, No. (2001), 37. Research Paper.

[47]

G. Holger and D. Greenaway., Much ado about nothing? Do domestic firms really benefit from foreign direct investment?, The World Bank Research Observer 19.2, (2004), 171–197.

[48]

M. Ikegami, M. R. Carter, C. B. Barrett and S. Janzen, Poverty traps and the social protection paradox", NBER Chapters, in The Economics of Poverty Traps National Bureau of in The Economics of Poverty Traps, University of Chicago Press.

[49]

A. Kraay and D. McKenzie, Do Poverty Traps Exist? Assessing the Evidence, J. Econom. Perspectives, 28 (2014), 127-148.  doi: 10.1257/jep.28.3.127.

[50]

P. Krugman, Increasing returns and economic geography, J. Polit. Econ., 99 (1991), 483-499.  doi: 10.1086/261763.

[51]

M. Katz and C. Shapiro, Technology adoption in the presence of network externalities, J. Polit. Econ., 94 (1986), 822-841.  doi: 10.1086/261409.

[52]

P. T. Leeson, Escaping poverty: Foreign aid, private property, and economic development, The Journal of Private Enterprise, 23 (2008), 39-64. 

[53]

E. M. Liu and J. K. Huang, Risk preferences and pesticide use by cotton farmers in China, J. Develop. Econom., 103 (2013), 202-215. 

[54]

G. C. Loury, Intergenerational transfers and the distribution of earnings, Econometrica, 49 (1981), 843-867.  doi: 10.2307/1912506.

[55]

R. E. Lucas Jr., On the Mechanics of Economic Development, J. Monetary Econom., 22 (1988), 3-42.  doi: 10.1016/0022-0531(77)90108-9.

[56]

K. Matsuyama, Poverty traps, in The New Palgrave Dictionary of Economics, New York: Palgrave Macmillan, 2008.

[57]

R. McDonald and D. Siegel, The value of waiting to invest, Quart. J. Econom., 101 (1986), 707-728.  doi: 10.2307/1884175.

[58]

D. Moyo, Dead Aid: Why Aid is not Working and How there is a Better Way for Africa, Macmillan, 2009.

[59]

M. Obstfeld, Rational and Self-Fulfilling Balance-of-Payments Crises, Amer. Econom. Rev., 76 (1986), 72-81. 

[60]

M. Obstfeld, Models of currency crises with self-fulfilling features, Eur. Econom. Rev., 40 (1996), 1037-1047.  doi: 10.1016/0014-2921(95)00111-5.

[61]

OECD/WTO, Aid for trade at a glance 2011: Showing results, WTO, Geneva/OECD Publishing, Paris, 2011.

[62]

OECD, Development co-operation report, Paris: OECD, 2018. doi: 10.1787/dcr-2018-en.

[63]

R. Pindyck, Irreversibility, uncertainty and investment, J. Econom. Lit., 29 (1991), 1110-1148. 

[64]

V. Polterovich, Institutional Trap, in The New Palgrave Dictionary of Economics, London, Palgrave Macmillan, 2008. doi: 10.1057/978-1-349-95121-5_2717-1.

[65]

R. G. Rajan and A. Subramanian, Aid, Dutch disease, and manufacturing growth, J. Develop. Econom., 94 (2011), 106-118. 

[66]

P. Rivoli and E. Salorio, Foreign direct investment and investment under uncertainty, J. Internat. Bus. Stud., 27 (1996), 335-357.  doi: 10.1057/palgrave.jibs.8490138.

[67]

P. M. Romer, Increasing returns and long-run growth, J. Polit. Econ., 94 (1986), 1002-1037. 

[68]

J. Sachs, The End of Poverty: Economic Possibilities for Our Time, The Penguin Press: New York, 2005.

[69]

E. Saltari and G. Travaglini, The effects of environmental policies on the abatement investment decisions of a green firm, Resource and Energy Economics, 33 (2011), 666-685.  doi: 10.1016/j.reseneeco.2011.02.001.

[70]

E. Sanchez Carrera, Evolutionary dynamics of poverty traps, J. Evol. Econom., 96 (2018), 611–630. doi: 10.1007/s00191-018-0575-3.

[71]

P. Santos and C. Barrett, Persistent poverty and informal credit, J. Develop. Econom., 96 (2011), 337-347.  doi: 10.1016/j.jdeveco.2010.08.017.

[72]

D. StockemerB. LaMontagne and J. Charrette, Panacea, placebo, or poison? The impact of development aid on growth. Canadian, J. Develop. Stud., 32 (2011), 3-16.  doi: 10.1080/02255189.2011.576133.

[73]

A. Verschoor and A. Kalwij, Aid, social policies and pro-poor growth, J. Internat. Develop., 18 (2006), 519-532.  doi: 10.1002/jid.1248.

[74]

F. M. VieiderP. MartinssonP. K. Nam and N. Truong, Risk preferences and development revisited, Theory and Decision, 86 (2019), 1-21.  doi: 10.1007/s11238-018-9674-8.

[75]

World Bank Group, Global Investment Competitiveness Report 2017/2018: Foreign Investor Perspectives and Policy Implications, Washington, DC, World Bank, 2018. doi: 10.3982/QE300.

[76]

J. Y. Wu and C. Hsu, Foreign direct investment and income inequality: Does the relationship vary with absorptive capacity?, Economic Modelling, 29 (2012), 2183-2189.  doi: 10.1016/j.econmod.2012.06.013.

[77]

F. J. Zimmerman and M. R. Carter, Asset smoothing, consumption smoothing and the reproduction of inequality under risk and subsistence constraints, J. Develop. Econom., 71 (2003), 233-260. 

Figure 1.  Source: [62] DAC statistics
Figure 2.  Source: UNCTAD (2014). Inward and outward foreign direct investment flows, annual, 1970-2012
Figure 3.  Source: Own elaboration. Values of Waiting and Investing
Figure 4.  Source: Own elaboration. Real option value for $ \sigma = 0.2 $ and $ 0.3. $
Figure 5.  Source: Own elaboration. Real option value for $ \alpha = 0.06 $ and $ 0.08. $
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