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Optimal capital accumulation under price uncertainty and costly reversibility

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  • Alvarez, Luis H.R.

Abstract

We consider the optimal capital accumulation policy of a competitive firm operating in the presence of decreasing returns to scale, price uncertainty, and costly reversibility of investment. We characterize the optimal accumulation policy and derive the value of the firm by focusing on the marginal investment decision and solving the associated optimal timing problem characterizing the option value of the associated opportunity to either disinvest or acquire a marginal unit of capacity. We also characterize the required exercise premia associated with the optimal policies and demonstrate that hysteresis prevails within this class of accumulation problems as well.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 10 (October)
Pages: 1769-1788

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:10:p:1769-1788

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Price uncertainty Capital accumulation Costly reversibility Expansion options Disinvestment opportunity Hysteresis;

References

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Citations

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Cited by:
  1. Pekka Matomäki, 2012. "On solvability of a two-sided singular control problem," Computational Statistics, Springer, vol. 76(3), pages 239-271, December.
  2. Xin Guo & Pascal Tomecek, 2008. "Solving Singular Control from Optimal Switching," Asia-Pacific Financial Markets, Springer, vol. 15(1), pages 25-45, March.
  3. Andrianos Tsekrekos, 2013. "Irreversible exit decisions under mean-reverting uncertainty," Journal of Economics, Springer, vol. 110(1), pages 5-23, September.

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