Expandability, reversibility, and optimal capacity choice
By: Avinash K. Dixit, Robert S. Pindyck.
Contributors: Pindyck, Robert S.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 6373; Working paper series (National Bureau of Economic Research) -- working paper no. 6373.
Publisher: National Bureau of Economic Research
Published: 1998
Place of publication: Cambridge, MA
Language: eng
Number of pages: 28
Subjects: Disinvestment -- Econometric models.; Capital investments -- Econometric models.
Description: We develop continuous-time models of capacity choice when demand fluctuates stochastically, and the firm's opportunities to expand or contract are limited. Specifically, we 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.
Notes: "January 1998."

JEL no. D92, E22.

Includes bibliographical references (p. 27-28).

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Financial support from the National Science Foundation