Investment, Capacity Constraints and Uncertainty on the Input Price.

This paper expands on the theory of irreversible investment under uncertainty, incorporating capacity constraints and uncertainty of input price. No restriction on the demand elasticity value is imposed. Assuming that the input price follows a geometric Brownian motion, the optimal irreversible investment policy of a risk-neutral regulated firm is analyzed. A simple rule, that maximizes social welfare, is derived and used to compute the optimal exercise rule, in several numerical simulations.