Expandability, Reversibility, and Optimal Capacity Choice
We develop continuous-time models of capacity choice when demand fluctuates stochastically, and the firm's opportunities to expand or contract are limited. Specifically consider costs of investing or disinvesting that vary with time, or with the amount of capacity already installed. The firm's limited opportunities to expand or contract create call and put options on incremental units of capital; we show how the values of these options affect the firm's investment decisions.
|Date of creation:||Jan 1998|
|Date of revision:|
|Publication status:||published as Brennan, M. J. and L. Trigeorgis (eds.) Project Flexibility, Agency, and Competition. Oxford University Press, 1999.|
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NBER Working Papers
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"Options, the Value of Capital, and Investment,"
NBER Working Papers
5227, National Bureau of Economic Research, Inc.
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