Committing and Reneging A Dynamic Model of Policy Regimes

Actual policy decisions are made in real time and are not irrevocable, but most policy modeling has neglected these mundane factors. In an environment of uncertainty, the ability to switch policies adds an option value to the choice problem. This "option to wait" makes the incumbent regime relatively more attractive (compared to the traditional once-and-for-all analysis), as does increased uncertainty, which increases the value of the option. Furthermore, because the commitment decision takes place in real time, policy choice displays hysteresis. This approach also extends some results in the real options literature.