Optimal Capacity in the Anhydrous Ammonia Industry

Kyle Stiegert () and Thomas Hertel

American Journal of Agricultural Economics, 1997, vol. 79, issue 4, 1096-1107

Abstract: This study analyzed the status of manufacturing capacity in the U.S. anhydrous ammonia industry (1971–91). Pindyck's (1988) real option model was extended to account for mean-reverting tendencies in the marketing margin to determine optimal capacity for each year. The key result of the study is that the 30% expansion in 1973–74 would not have been recommended by the real option model, while traditional discounted cash flow approaches available in the 1970s could have easily rationalized the choices made by the industry. The results underscore the potential gains in predictive power from using the real option model in analyzing large, irreversible investments. Copyright 1997, Oxford University Press.

Date: 1997
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ajagec:v:79:y:1997:i:4:p:1096-1107

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