Actual policy decisions are made in real time and are not irrevocable. These observations are mundane, but most policy modeling has neglected them. We show that when policy is made in an environment of uncertainty, costs of switching policies give the option to wait positive value. This insight...

An explanation of how irreversible investment and the techniques associated with pricing real options can apply to a broad range of problems in finance, macroeconomics, and trade policy.

Considering time inconsistency as a problem of irreversible investment brings some neglected points to the fore. Making a policy choice in real time and under current conditions emphasizes the importance of the timing of commitment, the regret over past decisions, and the option value of not...

An examination of the dynamics of commitment, showing that because the decision regarding rules versus discretion occurs in real time, opting for discretion is often the better choice, since it leaves open the possibility of adopting rules later on.