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Risk induced resource dependency in capacity investments

Author

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  • Kettunen, Janne
  • Bunn, Derek W.

Abstract

A capacity acquisition process is resource dependent when the existing resources impact the valuation of new resources and thereby influence the investment decision. Following a formal analysis of resource dependency, we show that uncertainty and aversion to risks are sufficient conditions for resource dependent capacity acquisition. Distinct from the technology lock-in effects of increasing returns to scale or learning, risk aversion can induce diversity. We develop a stochastic programming framework and solve the optimization problem by decomposing the problem into investment and operational horizon subproblems. Our computational results for an application to the electricity sector show, inter alia, that technology choices between low carbon and fossil fuel technologies, as well as their investment timings, are dependent upon the resource bases of the companies, with scale, debt leverage and uncertainty effects increasing resource dependency. Particularly, we show that resource dependency can significantly impact the optimal investment decisions and we argue that it should be evaluated at both company and policy levels of analysis.

Suggested Citation

  • Kettunen, Janne & Bunn, Derek W., 2016. "Risk induced resource dependency in capacity investments," European Journal of Operational Research, Elsevier, vol. 250(3), pages 914-924.
  • Handle: RePEc:eee:ejores:v:250:y:2016:i:3:p:914-924
    DOI: 10.1016/j.ejor.2015.10.037
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    References listed on IDEAS

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    Cited by:

    1. Chen, Liang & Kettunen, Janne, 2017. "Is certainty in carbon policy better than uncertainty?," European Journal of Operational Research, Elsevier, vol. 258(1), pages 230-243.
    2. Li, Bo & Arreola-Risa, Antonio, 2017. "Financial risk, inventory decision and process improvement for a firm with random capacity," European Journal of Operational Research, Elsevier, vol. 260(1), pages 183-194.

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