Expandability, Reversibility, and Optimal Capacity Choice

31 Pages Posted: 14 Jul 2000  

Avinash Dixit

Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Robert S. Pindyck

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

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

Avinash K. Dixit (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States
609-258-4013 (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/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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