Valuing Modularity as a Real Option

Andrea Gamba and Nicola Fusari ()
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Nicola Fusari: University of Lugano, 6900 Lugano, Switzerland; and Swiss Finance Institute, 1211 Geneva, Switzerland

Management Science, 2009, vol. 55, issue 11, 1877-1896

Abstract: We provide a general valuation approach for capital budgeting decisions involving the modularization in the design of a system. Within the framework developed by Baldwin and Clark (Baldwin, C. Y., K. B. Clark. 2000. Design Rules: The Power of Modularity. MIT Press, Cambridge, MA), we implement a valuation approach using a numerical procedure based on the least-squares Monte Carlo method proposed by Longstaff and Schwartz (Longstaff, F. A., E. S. Schwartz. 2001. Valuing American options by simulation: A simple least-squares approach. Rev. Financial Stud. 14(1) 113-147). The approach is accurate, general, and flexible.

Keywords: real options; modularity; least-squares Monte Carlo (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (23)

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Working Paper: Valuing modularity as a real option (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:55:y:2009:i:11:p:1877-1896

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