Investment timing, capacity choice and optimal floors and ceilings

Dean Paxson, Paulo J. Pereira and Artur Rodrigues

Journal of Economic Dynamics and Control, 2022, vol. 139, issue C

Abstract: We develop a model for determining the optimal timing and capacity choice of investment under floors and ceilings (collars). We study how a welfare maximizing finite-lived collar can be optimally designed. Our findings show that for a linear demand function, multiple collar arrangements are optimal, including pure floors and fixed price regimes. Departing from previous literature, our results suggest that pure ceiling regimes are not optimal. When the demand function is isoelastic, optimal schemes are not attainable.

Keywords: Collars; Capacity choice; Real options; Price ceilings; Price floors (search for similar items in EconPapers)
JEL-codes: D81 G31 G38 H25 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:139:y:2022:i:c:s0165188922001324

DOI: 10.1016/j.jedc.2022.104430

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