Sequential capacity expansion options
| Autor: | Alain Bensoussan, Benoît Chevalier-Roignant |
|---|---|
| Jazyk: | angličtina |
| Rok vydání: | 2018 |
| Předmět: |
050208 finance
021103 operations research real options investment under uncertainty 05 social sciences 0211 other engineering and technologies capacity investment 02 engineering and technology Management Science and Operations Research Investment (macroeconomics) Computer Science Applications Microeconomics hysteresis 0502 economics and business Economics Production (economics) |
| Popis: | This paper considers a firm’s capacity expansion decisions under uncertainty. The firm has leeway in timing investments and in choosing how much capacity to install at each investment time. We model this problem as the sequential exercising of compound capacity expansion options with embedded optimal capacity choices. We employ the impulse control methodology and obtain a quasi-variational inequality that involves two state variables: an exogenous, stochastic price process and a controlled capacity process (without a diffusion term). We provide a general verification theorem and identify—and prove the optimality of—a two-dimensional (s,S) (s,S) -type policy for a specific (admittedly restrictive) choice of the model parameters and of the running profit. The firm delays investment in capacity to ensure that the perpetuity value of newly installed capacity exceeds the total opportunity cost, including the fixed cost component, by a sufficient margin. Our general model for “the option to expand” transcends a single-option exercise and yields predictions of both the optimal investment timing and the optimal scale of production. |
| Databáze: | OpenAIRE |
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