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New insights in capacity investment under uncertainty

Balter,Anne
; 
Huisman,Kuno
; 
Kort,Peter M.
Abstract
An important development in the real options theory is the notion that an investment decision is not only about timing but also about size. This plays for instance a crucial role when the firm has market power, implying that quantity affects the output price. Analyzing the resulting problem requires the inclusion of a demand function in the real options model. The present paper analyzes the general problem, and gives an overview of possible demand functions and its implications for the optimal investment decision. We carry out an extensive comparative statics analysis of the uncertainty parameter, the market trend, and the discount rate, thereby distinguishing between net present value (NPV), option, and quantity effects.
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Date
2022-11
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Tilburg University Research Output Collection
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Keywords
investment under uncertainty, real options, optimal stopping, capacity size, D92 - Intertemporal Firm Choice, Investment, Capacity, and Financing, D81 - Criteria for Decision-Making under Risk and Uncertainty
Citation
Balter, A, Huisman, K & Kort, P M 2022, 'New insights in capacity investment under uncertainty', Journal of Economic Dynamics & Control, vol. 144, 104499. https://doi.org/10.1016/j.jedc.2022.104499
URI
https://hdl.handle.net/20.500.14602/77778
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