A model of capacity choice under Knightian uncertainty

Niu, Yingjie; Zhou, Lei; Zou, Zhentao

doi:10.1016/j.econlet.2018.11.024

Cited by 10 publications

(4 citation statements)

References 10 publications

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“…where QðtÞ is the total market output, a > 0 denotes the production technology parameter, and γ ð0,1Þ indicates the elasticity of output that ensures diminishing returns on capital. The chosen production function aligns with previous studies such as Bertola and Caballero (1994), Nakamura (2002), Lyandres et al (2020), Niu et al (2019), and Huberts and Silveira (2023).…”

Section: Basic Economic Settingmentioning

confidence: 56%

Optimal investment timing and size decision‐making with jump risk and time‐inconsistent preferences

Wang,

2024

Manage Decis Econ

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This paper analyzes a firm's investment timing and capacity decision by considering the manager's time‐inconsistent preferences and continuous economic depreciation of the capital stock cannot be completely offset. The demand shock of the underlying product evolves according to a double exponential jump‐diffusion process. Within a real options framework, we derive the explicit expressions for the optimal investment threshold and investment size when the manager is sophisticated. We find that time‐inconsistent preferences will lead the firm to delay investment when capital depreciation rate is low and accelerate investment when the rate of capital depreciation is high. Further, we show that capital depreciation rate has a monotonic positive effect on the investment size of a time‐consistent manager but a non‐monotonic effect on that of a sophisticated manager. A sophisticated manager tends to choose a smaller investment size than a time‐consistent manager. Finally, we demonstrate that compared with the geometric Brownian motion, the firm invests later with a larger capacity under the jump‐diffusion model.

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Section: Basic Economic Settingmentioning

confidence: 56%

Optimal investment timing and size decision‐making with jump risk and time‐inconsistent preferences

Wang,

2024

Manage Decis Econ

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“…Proper scaling of the firm's capital value helps to enhance its expansion decision. As articulated by Niu et al (2019), the principles of Knightian uncertainty can be included in the standard model for capacity choice to indicate that it reduces the capital of marginal value. It makes the firm's investment decision more conservative.…”

Section: Literature Review the Role Of Assets-in-place On A Firm's In...mentioning

confidence: 99%

The Impact of Assets-in-place on Corporate Financing and Investment Decisions for Capital Budgeting

-¹

2023

IJFMR

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The investment capacity of organisations is dictated by their present assets. Corporate financing and investment decisions for capital budgeting can be dependent on the organisational capacity to make profitable and long-term investments. The study analyses the impact of assets in place on corporate financing and investment decisions for capital budgeting. A qualitative and deductive approach was adopted by the paper to ensure that the collection of data was conducted on various reliable, relevant and authentic secondary resources. The findings of the study indicate that flexibility and uncertainties while decision-making for investments are impacted by assets in place as it provides greater opportunities for growth. However, certain internal and firm-specific factors may emphasise uncertainties in investment decisions. In conclusion, the assets in place help the company to grow through the maturation and lifecycle management of these assets.

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“…However, [15] and [11] investigate the case in which the payoff is received as a perpetual flow and show that higher levels of KU may delay investment because it is not resolved after the investment has been undertaken. [16] incorporate KU into a model of capacity choice and expansion. They too find that the optimal investment threshold under KU is substantially higher, but the payoff in the model is also a flow and, as such, the KU is not resolved upon stopping.…”

Section: Introductionmentioning

confidence: 99%

“…In particular, many facets of investment and management problems are incorporated into their basic framework (see [2] and [9] for relatively recent and comprehensive reviews). As I pointed out, the impact of operational delay is underresearched but the impact of KU has gained traction on both the theoretical and empirical fronts ( [6]; [15]; [20]; [11]; [19]; [16] and [5] are just a limited sample).…”

Section: Introductionmentioning

confidence: 99%

The impact of operational delay on irreversible investment under Knightian uncertainty

Delaney

2022

Economics Letters

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A model of capacity choice under Knightian uncertainty

Cited by 10 publications

References 10 publications

Optimal investment timing and size decision‐making with jump risk and time‐inconsistent preferences

Optimal investment timing and size decision‐making with jump risk and time‐inconsistent preferences

The Impact of Assets-in-place on Corporate Financing and Investment Decisions for Capital Budgeting

The impact of operational delay on irreversible investment under Knightian uncertainty

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