This paper presents a tractable model of a firm that chooses both the scale and timing of its investment. The value-maximizing investment policy is lumpy, and sensitivity analysis shows that greater demand volatility is associated with the firm choosing to invest in larger increments, less...

This paper uses a competitive-equilibrium housing-market model to evaluate the role that interest rates played in the U.S. housing boom and bust. The model features stochastic construction costs, disposable income, interest rates, and population, and endogenously determines the supply of...

We appraise the theoretical basis and the consequent empirical work of Frank Wolak in his study of the New Zealand Electricity market in a report to the New Zealand Commerce Commission released in March 2009. The report found no multilateral actions, but concluded there was evidence of market...

This paper shows how scale economies affect welfare-maximizing regulation and regulated firms' investment behavior. Price-regulated firms take less advantage of scale economies than social planners, with greater investment distortions for greater economies of scale. Price caps should be below...

This paper shows how the cash flows received by an unregulated firm operating in a workably competitive market can be replicated for a regulated firm. The only change to standard regulatory practice is that each time the regulated firm invests, the amount added to its rate base is the product of...

This paper analyzes the timing and density of urban development using a new intertemporal model featuring stochastic housing demand, a finite price elasticity of demand, cross-sectional variation in the amenity value of land, and property taxes. Equilibrium rent and house prices in a city are...

The existing real options literature explains the value premium as a consequence of either operating leverage raising risk in low-demand states or industry-wide investment lowering risk in high-demand states. This paper presents a simple model in which a value premium arises solely from capacity...

This paper surveys the theoretical literature investigating the effect of firms' investment flexibility on the cross-section of expected stock returns. Real options analysis derives firms' value-maximizing investment policies as functions of exogenous fundamental drivers of profitability and...

This paper uses an example involving a commercial real estate project to demonstrate the practical application of real options analysis. The approach described can be used to value the project at any stage of construction, which is especially useful when market conditions are poor and suspension...