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Cited by 574

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Irreversible Investment, Capacity Choice, and the Value of the Firm

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Pindyck, Robert·1986·National Bureau of Economic Research
DOI 10.3386/w1980
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Abstract

A model of capacity choice and utilization is developed consistent with value maximization when investment is irreversible and future demand is uncertain.Investment requires the full value of a marginal unit of capacity to be at least as large as its full cost.The former includes the value of the firms option not to utilize the unit, and the latter includes the opportunity cost of exercising the investment option.We show that for moderate amounts of uncertainty, the firm's optimal capacity is much smaller than it would be if investment were reversible, and a large fraction of the firirVs value is due to the possibility of future growth.We also characterize the behavior of capacity and capacity utilization, and discuss implications far the measurement of marginal cost and Tobin's q.

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Metadata

Authors
Pindyck, R.
Venue
National Bureau of Economic Research
Publisher
National Bureau of Economic Research
Published
1986-07
DOI
10.3386/w1980
OpenAlex
W1579562321
Cited by
574
References
0
Type
report
Language
en
Open access
green

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CoChat. (2026). Citation check: Irreversible Investment, Capacity Choice, and the Value of the Firm. https://app.cochat.ai/papers/10.3386/w1980
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Pindyck, R. (1986). Irreversible Investment, Capacity Choice, and the Value of the Firm. National Bureau of Economic Research. https://doi.org/10.3386/w1980

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