Expandability, reversibility, and optimal capacity choice
Name
38543747.pdf
Size
1.52 MB
Format
Adobe PDF
Checksum (MD5)
9329dd57b45a94c280ad1c3faec53426
Author(s)
Dixit, Avinash K.
Pindyck, Robert S.
Date Issued
1997
Publisher
MIT Center for Energy and Environmental Policy Research
Series/Report no.
MIT-CEEPR (Series) ; 97-006WP.
Abstract
We develop continuous-time models of capacity choice when demand fluctuates stochastically, and the firm's opportunities to expand or contract are limited. Specifically, we consider costs of investing or disinvesting that vary with time, or with the amount of capacity already installed. The firm's limited opportunities to expand or contract create call and put options on incremental units of capital; we show how the values of these options affect the firm's investment decisions.
Persistent DSpace Link
