31 Pages Posted: 14 Jul 2000
Date Written: January 1998
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