𝔖 Bobbio Scriptorium
✦   LIBER   ✦

A real-option rationale for investing in excess capacity

✍ Scribed by Sudipto Sarkar

Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
190 KB
Volume
30
Category
Article
ISSN
0143-6570

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

Excess capacity is expensive, yet persistent excess capacity is widely observed in the corporate sector. Using a real‐option approach to capacity planning, this paper shows that under certain conditions it is optimal to invest in long‐term (even permanent) excess capacity. This results from the asymmetric nature of operating flexibility resulting from excess capacity—the ability to increase output under favorable demand shocks. The model is used to identify conditions under which excess capacity is more likely to be optimal. The implications are generally consistent with existing empirical evidence from studies on excess capacity and capacity utilization. Copyright © 2008 John Wiley & Sons, Ltd.

📜 SIMILAR VOLUMES

Investment in antiviral drugs: a real op
Investment in antiviral drugs: a real options approach
✍ Arthur E. Attema; Anna K. Lugnér; Talitha L. Feenstra 📂 Article 📅 2009 🏛 John Wiley and Sons 🌐 English ⚖ 155 KB

## Abstract Real options analysis is a promising approach to model investment under uncertainty. We employ this approach to value stockpiling of antiviral drugs as a precautionary measure against a possible influenza pandemic. Modifications of the real options approach to include risk attitude and