Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Timing and Scale of Investment Under Uncertainty

Contents:

Author Info

  • John P. Small

    ()

Registered author(s):

    Abstract

    This paper studies optimal investment in sunk assets for a firm facing uncertain future demand and costs. The investment problem is decomposed into decisions over scale and timing which are influenced by convex adjustment costs and the feasibility of delaying investment. The value of the resulting real option to delay behaves as expected in response to increases in demand and cost uncertainty but has new timing and scale interpretations. The larger is the option value, the more capital would be installed if delay were not profitable. The timing of investment, however, is controlled by the expected trajectory of capital prices relative to the firm's discount rate. The analysis also suggests an empirical model for aggregate investment which explains 96% of the variation in real annual investment for Canada over the period (1981-94) using regressors formed from only three variables: business confidence, capital prices and real interest rates.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.uvic.ca/socialsciences/economics/assets/docs/econometrics/ewp9906.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 9906.

    as in new window
    Length: 20 pages
    Date of creation: 02 Jun 1999
    Date of revision:
    Handle: RePEc:vic:vicewp:9906

    Note: ISSN 1485-6441
    Contact details of provider:
    Postal: PO Box 1700, STN CSC, Victoria, BC, Canada, V8W 2Y2
    Phone: (250)721-6197
    Fax: (250)721-6214
    Web page: http://web.uvic.ca/econ
    More information through EDIRC

    Related research

    Keywords: Investment; timing; scale;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Andrew B. Abel & Avinash Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 753-77, August.
    2. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
    3. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
    4. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. John P. Small & Henry Ergas, 1999. "The Rental Cost of Sunk and Regulated Capital," Econometrics Working Papers 9908, Department of Economics, University of Victoria.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:vic:vicewp:9906. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lori Cretney).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.