Expandability, Reversibility, and Optimal Capacity Choice
31 Pages
Posted: 14 Jul 2000
Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
Date Written: January 1998
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.
Suggested Citation:
Suggested Citation
Dixit, Avinash and Pindyck, Robert S., Expandability, Reversibility, and Optimal Capacity Choice (January 1998). NBER Working Paper No. w6373. Available at SSRN: https://ssrn.com/abstract=226122
