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Optimal Investment in the Presence of Investment Shock and Congestion

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  • Alberto A. Gaggero

Abstract

This paper develops a dynamic overlapping-generations model in the presence of investment shocks and aims to understand how social welfare is affected by the investment decision of the firm and by the time of demand of the consumers. By simulating the model, I find that to maximize social welfare a considerable proportion of consumers should postpone their demand. Rational consumers, in fact, react to congestion by shifting their demand to the next period, whenever there is a positive shock affecting the investment function. However, policy-makers should consider policies favouring investment very carefully, since investment affects social welfare via a bell-shaped function.

Suggested Citation

  • Alberto A. Gaggero, 2008. "Optimal Investment in the Presence of Investment Shock and Congestion," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(2), pages 327-342, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200806)164:2_327:oiitpo_2.0.tx_2-2
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    References listed on IDEAS

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    1. Kwanho Shin & Jaewoo Lee, 2000. "The Role of a Variable Input in the Relationship between Investment and Uncertainty," American Economic Review, American Economic Association, vol. 90(3), pages 667-680, June.
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    3. John Haltiwanger & Russell Cooper & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September.
    4. J. B. Taylor & M. Woodford (ed.), 1999. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 1, number 1.
    5. Stokey, Nancy L, 1998. "Are There Limits to Growth?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 1-31, February.
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    More about this item

    JEL classification:

    • L80 - Industrial Organization - - Industry Studies: Services - - - General
    • L90 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - General
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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