Title
Uncertainty and stepwise investment Uncertainty and stepwise investment
Author
Faculty/Department
Faculty of Applied Economics
Publication type
article
Publication
Amsterdam ,
Subject
Sociology
Economics
Computer. Automation
Source (journal)
European journal of operational research
European journal of operational research. - Amsterdam
Volume/pages
202(2010) :1 , p. 196-203
ISSN
0377-2217
0377-2217
ISI
000271700800023
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Affiliation
University of Antwerp
Abstract
We analyze the optimal investment strategy of a firm that can complete a project either in one stage at a single freely chosen time point or in incremental steps at distinct time points. The presence of economies of scale gives rise to the following trade-off: lumpy investment has a lower total cost, but stepwise investment gives more flexibility by letting the firm choose the timing individually for each stage. Our main question is how uncertainty in market development affects this trade-off. The answer is unambiguous and in contrast with a conventional real-options intuition: higher uncertainty makes the single-stage investment more attractive relative to the more flexible stepwise investment strategy.
E-info
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