OPTIMAL INVESTMENT IN INTERRELATED PROJECTS

Shasikanta Naindebam (), Marzia Raybaudi and Martin Sola
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Shasikanta Naindebam: Department of Economics, University of Bath, Bath BA2 7AY, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2022, vol. 25, issue 07n08, 1-25

Abstract: This paper addresses the effects in partial equilibrium models of relaxing one of the critical underlying assumptions of [A. K. Dixit & R. S. Pindyck (1994) Investment Under Uncertainty. Princeton: Princeton University Press] to investment under uncertainty: either the potential investor has access to a single project or can consider competing (or complementary) projects independently. This paper studies the investment decision of a multi-product monopolist where the projects exhibit interdependence between the cash flows of different products. We derive the optimal entry time for each product and show that the choice and investment timing differ from that suggested by the single project approach. It is well known that the decision to produce related goods simultaneously or sequentially crucially depends on their degree of substitutability or complementarity. We derive the optimal timing for the investment under this scenario.

Keywords: Optimal investment; interrelated projects (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S0219024922500315

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