Investment Under Uncertainty

by Dixit, Avinash K.

• ISBN13: 9780691034102
• ISBN10: 0691034109
• Format: Hardcover
• Copyright: 1994-01-10
• Publisher: Princeton Univ Pr

Summary

How should firms decide whether and when to invest in new capital equipment, additions to their workforce, or the development of new products? Why have traditional economic models of investment failed to explain the behavior of investment spending in the United States and other countries? In this book, Avinash Dixit and Robert Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made. In so doing, they answer important questions about investment decisions and the behavior of investment spending. This new approach to investment recognizes the option value of waiting for better (but never complete) information. It exploits an analogy with the theory of options in financial markets, which permits a much richer dynamic framework than was possible with the traditional theory of investment. The authors present the new theory in a clear and systematic way, and consolidate, synthesize, and extend the various strands of research that have come out of the theory. Their book shows the importance of the theory for understanding investment behavior of firms; develops the implications of this theory for industry dynamics and for government policy concerning investment; and shows how the theory can be applied to specific industries and to a wide variety of business problems.

Author Biography

Avinash K. Dixit is John J. F. Sherrerd '52 University Professor of Economics at Princeton University.

Table of Contents

Preface
A New View of Investment	p. 3
Developing the Concepts Through Simple Examples	p. 26
Stochastic Processes and Ito's Lemma	p. 59
Dynamic Optimization under Uncertainty	p. 93
Investment Opportunities and Investment Timing	p. 135
The Value of a Project and the Decision to Invest	p. 175
Entry, Exit, Lay-Up, and Scrapping	p. 213
Dynamic Equilibrium in a Competitive Industry	p. 247
Policy Intervention and Imperfect Competition	p. 282
Sequential Investment	p. 319
Incremental Investment and Capacity Choice	p. 357
Applications and Empirical Research	p. 394
References	p. 429
Symbol Glossary	p. 445
Author Index	p. 449
Subject Index	p. 455
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