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Investment timing, capacity choice and optimal floors and ceilings

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  • Paxson, Dean
  • Pereira, Paulo J.
  • Rodrigues, Artur

Abstract

We develop a model for determining the optimal timing and capacity choice of investment under floors and ceilings (collars). We study how a welfare maximizing finite-lived collar can be optimally designed. Our findings show that for a linear demand function, multiple collar arrangements are optimal, including pure floors and fixed price regimes. Departing from previous literature, our results suggest that pure ceiling regimes are not optimal. When the demand function is isoelastic, optimal schemes are not attainable.

Suggested Citation

  • Paxson, Dean & Pereira, Paulo J. & Rodrigues, Artur, 2022. "Investment timing, capacity choice and optimal floors and ceilings," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:dyncon:v:139:y:2022:i:c:s0165188922001324
    DOI: 10.1016/j.jedc.2022.104430
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    References listed on IDEAS

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    More about this item

    Keywords

    Collars; Capacity choice; Real options; Price ceilings; Price floors;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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