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Expandability, reversibility, and optimal capacity choice

Author(s)
Dixit, Avinash K.; Pindyck, Robert S.
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Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research.
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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.
Date issued
1997
URI
http://hdl.handle.net/1721.1/50228
Publisher
MIT Center for Energy and Environmental Policy Research
Other identifiers
97006
Series/Report no.
MIT-CEEPR (Series) ; 97-006WP.

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