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

Author

Listed:
  • N. Letifi
  • Jean-Luc Prigent

    (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • N. Letifi & Jean-Luc Prigent, 2014. "On the optimality of funding and hiring/firing according to stochastic demand: The role of growth and shutdown options," Post-Print hal-03679708, HAL.
    • Handle: RePEc:hal:journl:hal-03679708
    DOI: 10.1016/j.econmod.2013.11.022
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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.
    2. Perera, Sandun & Gupta, Varun & Buckley, Winston, 2020. "Management of online server congestion using optimal demand throttling," European Journal of Operational Research, Elsevier, vol. 285(1), pages 324-342.

    More about this item

    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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