Working Paper

The Irreversibility Effect Revisited

Dec 31, 2005 | Urvashi Narain, W. Michael Hanemann, Anthony C. Fisher


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