EconPapers    
Economics at your fingertips  
 

A model of capacity choice under Knightian uncertainty

Yingjie Niu, Lei Zhou and Zhentao Zou

Economics Letters, 2019, vol. 174, issue C, 189-194

Abstract: This paper introduces Knightian uncertainty into the standard model of capacity choice and investigates its impact on the firm’s expansion decision. First, we find Knightian uncertainty reduces both the firm value and marginal value of capital. Under Knightian uncertainty, the firm’s expansion decision is shown to be more conservative. When the firm value is decomposed into the value of assets in place and growth opportunities, we find the value reduction caused by Knightian uncertainty is much more substantial for the value of growth opportunities. Finally, the implications of the user cost of capital and stationary distribution of firm value are also examined.

Keywords: Capacity choice; Knightian uncertainty; Assets in place; Growth opportunities (search for similar items in EconPapers)
JEL-codes: D81 E22 G31 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165176518304828
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:174:y:2019:i:c:p:189-194

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-08-24
Handle: RePEc:eee:ecolet:v:174:y:2019:i:c:p:189-194