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On the optimality of funding and hiring/firing according to stochastic demand: The role of growth and shutdown options

Author

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  • Letifi, N.
  • Prigent, J.-L.

Abstract

We examine the firm's investment and hiring/firing policy under stochastic demand with potential reversibility. We evaluate in particular the values of both investment and hiring/firing growth and shutdown options not only for the standard Cobb–Douglas production function but also when taking account of the natural upper bound on the output due to the demand level. For this latter purpose, we use results about average of options provided in Shackleton and Wojakowski (2007). As a by-product, we extend the approach of Tserlukevich (2008) by introducing the employment level to analyze in particular the optimality of the financial structure and leverage. Our approach allows us to get a quasi-explicit solution of the optimal firm's value that can be deeply analyzed. Such results can potentially explain the interest for flexible contractual arrangements with capital and labor firm's structure.

Suggested Citation

  • Letifi, N. & Prigent, J.-L., 2014. "On the optimality of funding and hiring/firing according to stochastic demand: The role of growth and shutdown options," Economic Modelling, Elsevier, vol. 40(C), pages 410-422.
  • Handle: RePEc:eee:ecmode:v:40:y:2014:i:c:p:410-422
    DOI: 10.1016/j.econmod.2013.11.022
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    References listed on IDEAS

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    Cited by:

    1. Bouasker, O. & Letifi, N. & Prigent, J.-L., 2016. "Optimal funding and hiring/firing policies with mean reverting demand," Economic Modelling, Elsevier, vol. 58(C), pages 569-579.

    More about this item

    Keywords

    Stochastic demand; Financial leverage; Employment level; Average of options; Growth and shutdown options;

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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