Uncertainty and stepwise investment

Kort, Peter M and Murto, Pauli and Pawlina, Grzegorz (2010) Uncertainty and stepwise investment. European Journal of Operational Research, 202 (1). pp. 196-203. ISSN 0377-2217

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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.

Item Type: Journal Article
Journal or Publication Title: European Journal of Operational Research
Additional Information: “NOTICE: this is the author’s version of a work that was accepted for publication in the European Journal of Operational Research. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Journal of Operational Research, [202, 1, (2010)] DOI:10.1016/j.ejor.2009.05.027”
Uncontrolled Keywords: /dk/atira/pure/researchoutput/libraryofcongress/hg
Subjects:
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 32274
Deposited By: Mr Richard Ingham
Deposited On: 18 Mar 2010 11:15
Refereed?: Yes
Published?: Published
Last Modified: 19 Sep 2019 23:48
URI: https://eprints.lancs.ac.uk/id/eprint/32274

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