analyzes the impact of financial constraints in a capacity investment
setting. We model a monopolist firm that decides on its technology choice
(flexible versus dedicated) and capacity level under demand uncertainty.
Differing from the majority of the stochastic capacity investment literature,
we assume that the firm is budget-constrained both in the capacity investment
and production stages, and that the production stage budget is stochastic.
Our analysis contributes to the capacity investment literature by extending
the theory of stochastic capacity investment to understand the impact of
financial constraints, and by analyzing the impact of budget variability on
the profitability of the firm. We demonstrate that budget variability is
detrimental for the firm with either technology, thus the firm is better off
by hedging the budget uncertainty through proper risk management. One of our
main contributions is to analyze the impact of financial constraints on the
flexible versus dedicated technology choice. We demonstrate that without
production costs,a higher internal budget favors the flexible technology only
when the fixed cost of the flexible technology is higher. With production
costs in place, and in the absence of fixed cost difference, a higher
internal budget favors the dedicated technology. This is because the total
investment cost is higher with the dedicated technology.