The Value of Flexibility in Sequencing Irreversible Investment¤
نویسندگان
چکیده
We analyze the investment decision of a ...rm that may complete a project either in one lump or in smaller parts at distinct points in time. The ...rm faces a trade-o¤ between the cost savings that arise when the project is completed in one go and the additional ‡exibility that arises when the ...rm is able to respond to resolving uncertainty by choosing optimal timing individually for each stage. We show that, contrary to a careless interpretation of the real option theory, higher uncertainty makes the lumpy investment more attractive relative to the apparently more ‡exible alternative of splitting the investment. JEL classi...cation: C61, D81, G31
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