Ex Post Flexibility and Choice of Capacity for Loss Reduction
1991
Hiebert, L Dean
This paper examines the implications of ex post utilization flexibility for the firm's ex ante choice of capacity to supply a loss‐reducing input. It is shown that the optimal ex ante choice is greater in the presence of flexibility than in the absence of flexibility. It is also shown that the total effect of an increase in risk on the ex ante choice includes a flexibility effect when ex post flexibility is present. The flexibility effect always tends to increase the demand for capacity.
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