Entry and exit decisions with linear costs under uncertainty

Abstract

From the viewpoint of stochastic programming, we rigorously analyse entry and exit decisions of a project which were proposed by Dixit [A. Dixit, Entry and exit decisions under uncertainty, J. Polit. Econ. 97 (1989), pp. 620-638]. In this article, instead of assuming that the costs are constant in classical research, we assume that they are linear with respect to the price of the commodity produced by the project. Under this assumption, we obtain a condition which guarantees that investing in the project is worthless; besides, the project may be terminated when the commodity price is greater than a certain value. In contrast, there are no such results provided that the costs are constant. Moreover, we provide an explicit solution of entry and exit decisions if the project is worthy to be invested in.

The Closed-Form Solution of an Extraction Model and Optimal Stopping Problems with Regime Switching

“…It is interesting to compare regime-switching cases with no-regime-switching cases. If there is no regime switching and the price P satisfies dP(t) = 0.01P(t)dt + 0.5P(t)dB(t), the optimal stopping time is inf{t : t > 0, P(t) ∈ (0, 10.35]} [27] (Theorem 4.5). However, if the price P satisfies dP(t) = 0.10P(t)dt + P(t)dB(t), the firm should never stop the extraction since r = 0.08 < 0.10 = µ 2 [28] (Theorem 5.1).…”

Entry-exit decisions with implementation delay under uncertainty

“…The background to entry-exit decisions is described as follows [19]. A firm has an option to invest in a project as well as stop it.…”

“…Many authors answered these two questions in the setting that there is no time lag between decision times and corresponding implementation times. For example, see [3,5,6,9,10,[15][16][17][18][19].…”

An investment model with switching costs and the option to abandon

“…Its numerous applications include the optimal scheduling of production in a real asset such as a power plant that can operate in distinct modes, say "open" and "closed", as well as the optimal timing of sequentially investing and disinvesting, e.g., in a given stock. The references Bayraktar and Egami [1], Brekke and Øksendal [2], Carmona and Ludkovski [4], Djehiche, Hamadène and Popier [7], Duckworth and Zervos [8], El Asri [9], El Asri and Hamadène [10], Elie and Kharroubi [11], Gassiat, Kharroubi and Pham [12], Guo and Tomecek [13], Hamadène and Jeanblanc [14], Hamadène and Zhang [15], Johnson and Zervos [17], Korn, Melnyk and Seifried [19], Lumley and Zervos [20], Ly Vath and Pham [21], Martyr [22], Pham [23], Pham, Ly Vath and Zhou [24], René, Campi, Langrené and Pham [25], Song, Yin and Zhang [26], Tang and Yong [27], Tsekrekos and Yannacopoulos [29], Zhang and Zhang [31], and Zhang [32] provide an alphabetically ordered list of important contributions in the area.…”