Optimal Investment with Costly Reversibility
AbstractInvestment is characterized by costly reversibility when a firm can purchase capital at a given price and sell capital at a lower price. We solve for the optimal investment of a firm that faces costly reversibility under uncertainty and we extend the Jorgensonian concept of the user cost of capital to this case. We define and calculate c[subscript U] and c[subscript L] as the user costs of capital associated with the purchase and sale of capital, respectively. Optimality requires the firm to purchase and sell capital as needed to keep the marginal revenue product of capital in the closed interval [c[subscript L], c[subscript U]]. This prescription encompasses the case of irreversible investment as well as the standard neoclassical case of costlessly reversible investment. Copyright 1996 by The Review of Economic Studies Limited.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Review of Economic Studies.
Volume (Year): 63 (1996)
Issue (Month): 4 (October)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0034-6527
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- Bertola, Guiseppe & Caballero, Ricardo J, 1994.
"Irreversibility and Aggregate Investment,"
Review of Economic Studies,
Wiley Blackwell, vol. 61(2), pages 223-46, April.
- Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
- Dixit, A., 1988.
"Entry And Exit Decisions Under Uncertainty,"
91, Princeton, Department of Economics - Financial Research Center.
- Pindyck, Robert S., 1986.
"Irreversible investment, capacity choice, and the value of the firm,"
1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December.
- Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
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