OPTIMAL INVESTMENT IN INTERRELATED PROJECTS

Author:

NAINDEBAM SHASIKANTA1,RAYBAUDI MARZIA2,SOLA MARTIN2

Affiliation:

1. Department of Economics, University of Bath, Bath BA2 7AY, UK

2. Department of Economics, Universidad Torcuato Di Tella, Avenida Figueroa Alcorta 7350, 1428 Buenos Aires, Argentina

Abstract

This paper addresses the effects in partial equilibrium models of relaxing one of the critical underlying assumptions of [A. K. Dixit & R. S. Pindyck (1994) Investment Under Uncertainty. Princeton: Princeton University Press] to investment under uncertainty: either the potential investor has access to a single project or can consider competing (or complementary) projects independently. This paper studies the investment decision of a multi-product monopolist where the projects exhibit interdependence between the cash flows of different products. We derive the optimal entry time for each product and show that the choice and investment timing differ from that suggested by the single project approach. It is well known that the decision to produce related goods simultaneously or sequentially crucially depends on their degree of substitutability or complementarity. We derive the optimal timing for the investment under this scenario.

Publisher

World Scientific Pub Co Pte Ltd

Subject

General Economics, Econometrics and Finance,Finance

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