|This centre is a member of The LSE Research Laboratory [RLAB]: CASE | CEE | CEP | FMG | SERC | STICERD||Cookies?|
Paper No' TE/1992/240: | Full paper
Save Reference as: BibTeX File | EndNote Import File
Keywords: Scale economies; uncertainty; optimal irreversible investment policy; capital; economic growth; profits.
Is hard copy/paper copy available? NO - Paper Copy Out Of Print.
This Paper is published under the following series: Theoretical Economics
Share this page: Google Bookmarks | Facebook | Twitter
Abstract:This paper analyses optimal irreversible investment policy when profits are subject to a multiplicative geometric Brownian motion shock. The marginal product of capital is increasing initially and decreasing thereafter. In the latter range, optimal policy is familiar: capacity is added gradually as the shock rises to a threshold where the expected return on the marginal unit is a required multiple of the cost of capital. The multiple reflects the option value of waiting. The optimal policy in the increasing marginal product range obeys the same multiple, now applied to the total return on the discrete increase in capital. Implications for economic growth, and suboptimal equilibria under external economies, are examined.
Copyright © STICERD & LSE 2005 - 2014 | LSE, Houghton Street, London WC2A 2AE | Tel: +44(0)20 7955 6699 | Email: email@example.com | Site updated 19 December 2014