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
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