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Investing in Biogas: Timing, Technological Choice and the Value of Flexibility from Inputs Mix

  • Michele Moretto

    (University of Padua)

  • Luca Di Corato

    (Swedish University of Agricultural Sciences)

In a continuous-time framework we study the technology and investment choice problem of a continuous co-digestion biogas plant dealing with randomly fluctuating relative convenience of input factor costs. Input factors enter into the productive process together mixed according to a given initial rule. Being inputs relative convenience stochastically evolving, a successive revision of the initial rule may be desirable. Hence, when the venture starts the manager may or may not install a flexible technology allowing for such option. Investment is irreversible and flexibility is costly. The problem is solved determining in the light of future prospects the optimal revision and then playing backward fixing the investment timing rule.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2009.84.

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Date of creation: Oct 2009
Date of revision:
Handle: RePEc:fem:femwpa:2009.84
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  1. He, Hua. & Pindyck, Robert S., 1989. "Investments in flexible production capacity," Working papers 2102-89., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Wang, Li Ming & Liu, Li Wen & Wang, Yong Jie, 2007. "Capacity decisions and supply price games under flexibility of backward integration," International Journal of Production Economics, Elsevier, vol. 110(1-2), pages 85-96, October.
  3. Mæng, H. & Lund, H. & Hvelplund, F., 1999. "Biogas plants in Denmark: technological and economic developments," Applied Energy, Elsevier, vol. 64(1-4), pages 195-206, September.
  4. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
  5. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  6. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
  7. Triantis, Alexander J & Hodder, James E, 1990. " Valuing Flexibility as a Complex Option," Journal of Finance, American Finance Association, vol. 45(2), pages 549-65, June.
  8. Michele Moretto & Gianpaolo Rossini, 2008. "Vertical Integration and Operational Flexibility," Working Papers 2008.37, Fondazione Eni Enrico Mattei.
  9. Alvarez, Luis H.R. & Stenbacka, Rune, 2007. "Partial outsourcing: A real options perspective," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 91-102, February.
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