Valuing Options to Learn: Optimal Timing of Information Acquisition

This article considers the value of information and optimal timing to acquire it in a model of irreversible investment. There are two types of uncertainties: first, the value of the investment project depends on an observable stochastic process, and second, it depends on an ex-ante uncertain parameter, whose true value may be learnt at a cost. The former type of uncertainty implies that the opportunity to acquire information has an option-like character: besides owning a real option on the actual project, the firm also owns an option to learn. We derive and illustrate the value of such learning options and the optimal timing to learn. Choosing the timing involves a trade-off: by postponing it the firm benefits from the delayed cost, but on the other hand suffers from increased likelihood that the revealed information would have been more beneficial earlier. JEL classification: D81, D83, D92, G31