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Expandability, Reversibility, and Optimal Capacity Choice

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Author Info
Avinash K. Dixit
Robert S. Pindyck

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6373.

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Date of creation: Jan 1998
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Handle: RePEc:nbr:nberwo:6373

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Find related papers by JEL classification:
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June. [Downloadable!] (restricted)
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  2. Dixit, Avinash, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-32, Winter. [Downloadable!] (restricted)
  3. Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, . "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
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  4. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-48, September. [Downloadable!] (restricted)
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  5. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December. [Downloadable!] (restricted)
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  6. Dixit, Avinash, 1995. "Irreversible investment with uncertainty and scale economies," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 327-350. [Downloadable!] (restricted)
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  7. Trigeorgis, Lenos, 1993. "The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 1-20, March. [Downloadable!]
  8. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Adela Luque, 2002. "An Option-Value Approach To Technology Adoption In U.S. Manufacturing: Evidence From Microdata," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 11(6), pages 543-568, January. [Downloadable!] (restricted)
  2. Hintermaier, Thomas & Steinberger, Thomas, 2002. "Occupational Choice and the Private Equity Premium Puzzle," Economics Series 122, Institute for Advanced Studies. [Downloadable!]
    Other versions:
  3. Michele Moretto & Sergio Vergalli, 2008. "Managing Migration through Quotas: an Option-theory Perspective," Working Papers 0805, University of Brescia, Department of Economics. [Downloadable!]
    Other versions:
  4. Richard Hartman & Michael Hendrickson, 1999. "Optimal Partially Reversible Investment," Discussion Papers in Economics at the University of Washington 0032, Department of Economics at the University of Washington. [Downloadable!]
  5. Li, Yong & James, Barclay & Madhavan, Ravi & Mahoney, Joseph T., 2006. "Real Options: Taking Stock and Looking Ahead," Working Papers 06-0114, University of Illinois at Urbana-Champaign, College of Business. [Downloadable!]
  6. Justin Y. Lin & Yingyi Tsai & Ching-Tang Wu, 2003. "Optimal Capital Investment, Uncertainty and Outsourcing," Microeconomics Working Papers 450, East Asian Bureau of Economic Research. [Downloadable!]
  7. Jyh-Bang Jou, 2001. "Environment, Asset Characteristics, and Optimal Effluent Fees," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 20(1), pages 27-39, September. [Downloadable!] (restricted)
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