Download This PaperExpandability, Reversibility, and Optimal Capacity Choice
31 Pages Posted: 14 Jul 2000 Last revised: 6 Jun 2002
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
Avinash K. Dixit (Contact Author)
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
609-258-4000 (Phone)
609-258-6419 (Fax)
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
HOME PAGE: http://www.CESifo.de
Robert S. Pindyck
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main Street
Cambridge, MA 02139
United States
617-253-6641 (Phone)
617-258-6855 (Fax)
HOME PAGE: http://web.mit.edu/rpindyck/www/
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