Sequential Capacity Expansion Options

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dc.contributor.ORCID0000-0003-0743-498X (Bensoussan, A)
dc.contributor.authorBensoussan, Alain
dc.contributor.authorChevalier-Roignant, Benoit
dc.contributor.utdAuthorBensoussan, Alain
dc.date.accessioned2020-07-27T18:41:00Z
dc.date.available2020-07-27T18:41:00Z
dc.date.issued2018-10-09
dc.descriptionDue to copyright restrictions and/or publisher's policy full text access from Treasures at UT Dallas is limited to current UTD affiliates (use the provided Link to Article).
dc.description.abstractThis 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)-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.
dc.description.departmentNaveen Jindal School of Management
dc.description.sponsorshipNational Science Foundation, Division of Mathematical Sciences [Grants DMS-1303775 and DMS-1612880] and the Research Grants Council of the Hong Kong Special Administrative Region [CityU-500113 and CityU-11303316].
dc.identifier.bibliographicCitationBensoussan, Alain, and Benoit Chevalier-Roignant. 2019. "Sequential Capacity Expansion Options." Operations Research 67(1): 33-57, doi: 10.1287/opre.2018.1752
dc.identifier.issn0030-364X
dc.identifier.issue1
dc.identifier.urihttp://dx.doi.org/10.1287/opre.2018.1752
dc.identifier.urihttps://hdl.handle.net/10735.1/8740
dc.identifier.volume67
dc.language.isoen
dc.publisherINFORMS
dc.rights©2018 INFORMS
dc.source.journalOperations Research
dc.subjectInvestments
dc.subjectHysteresis
dc.subjectReal options (Finance)
dc.subjectIrreversible investment
dc.subjectCash management
dc.subjectUncertainty
dc.subjectFinance--Mathematical models
dc.titleSequential Capacity Expansion Options
dc.type.genrearticle

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