Despite being rejected by finance theory, payback continues to be widelyused as a method for evaluating capital investment projects. In situations where investment can be delayed, we show that the value of waiting to invest is an increasing function of payback period. Consequently, the optimal...

We present a model featuring irreversible investment, economies of scale, uncertain future demand and capital prices, and a regulator who sets the firm's output price according to the cost structure of a hypothetical replacement firm. We show that a replacement firm has a fundamental cost...

Real options analysis typically assumes that projects are continuously evaluated and launched at precisely the time determined to be optimal. However, real world projects cannot be managed in this way because of the costs of formally evaluating an investment opportunity. This paper analyzes how...

The last thirty years have witnessed a fundamental change in the regulation of infrastructure industries. Whereas firms were subject to rate of return regulation and protected from entry in the past, now they face various forms of incentive regulation, competition is actively promoted by many...

Popular investment advice recommends that the stock/bond and stock/wealth ratios should rise with investor risk tolerance and investment horizon respectively, prescriptions that are difficult to reconcile with standard models of portfolio choice. Canner et al. (1997) point out that the first...

We show that regulators' price-setting, rate base, and allowed rate of return decisions are inextricably linked. Once regulators switch from traditional rate of return regulation, the irreversibility of much infrastructure investment significantly alters the results of the usual approach to...

We analyze the optimal hedging policy of a firm that has flexibility in the timing of investment. Conventional wisdom suggests that hedging adds value by alleviating the under-investment problem associated with capital market frictions. However, our model shows that hedging also adds value by...

We analyze the investment timing problem of a firm subject to a financing constraint. The threat of future funding shortfalls encourages the firm to accelerate investment beyond the level that is first-best optimal. Thus, our model highlights a new way by which costly external financing can...

We analyze the dynamic investment decision of a firm subject to an endogenous financing constraint. The threat of future funding shortfalls lowers the value of the firm's timing options and encourages acceleration of investment beyond the first-best optimal level. As well as highlighting another...

This paper demonstrates that new house prices can exceed direct development costs by considerable margins in competitive housing markets with finite price-elasticities of demand and no restrictive land-use regulation. The premium reflects the value of the option to delay developing the marginal...