Investment timing, capacity choice and optimal floors and ceilings

Abstract

We develop a model for determining the optimal timing and capacity choice of investment under floors and ceilings (collars). We study how a welfare maximizing finite-lived collar can be optimally designed. Our findings show that for a linear demand function, multiple collar arrangements are optimal, including pure floors and fixed price regimes. Departing from previous literature, our results suggest that pure ceiling regimes are not optimal. When the demand function is isoelastic, optimal schemes are not attainable.