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Expandability, Reversibility, and Optimal Capacity Choice

Avinash Dixit () and Robert Pindyck ()

No 6373, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop continuous-time models of capacity choice when demand fluctuates stochastically, and the firm's opportunities to expand or contract are limited. Specifically consider costs of investing or disinvesting that vary with time, or with the amount of capacity already installed. The firm's limited opportunities to expand or contract create call and put options on incremental units of capital; we show how the values of these options affect the firm's investment decisions.

JEL-codes: D92 E22 (search for similar items in EconPapers)
Date: 1998-01
Note: IO
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Published as Brennan, M. J. and L. Trigeorgis (eds.) Project Flexibility, Agency, and Competition. Oxford University Press, 1999.

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Working Paper: Expandability, reversibility, and optimal capacity choice (2003) Downloads
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