The Timing and Scale of Investment Under Uncertainty
نویسنده
چکیده
This paper studies optimal investment in sunk assets for a ̄rm facing uncertain future demand and costs. The investment problem is decomposed into decisions over scale and timing which are in°uenced by convex adjustment costs and the feasibility of delaying investment. The value of the resulting real option to delay behaves as expected in response to increases in demand and cost uncertainty but has new timing and scale interpretations. The larger is the option value, the more capital would be installed if delay were not pro ̄table. The timing of investment, however, is controlled by the expected trajectory of capital prices relative to the ̄rm's discount rate. The analysis also suggests an empirical model for aggregate investment which explains 96% of the variation in real annual investment for Canada over the period (1981-94) using regressors formed from only three variables: business con ̄dence, capital prices and real bond rates. The Timing and Scale of Investment Under Uncertainty 2
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