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Understanding Investment Irreversibility in General Equilibrium

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Author Info
Faig, Miquel

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Abstract

In general equilibrium, irreversibility affects both the wealth of consumers and the return on assets. As long as the inter-temporal elasticity of substitution is realistically low, irreversibility not only prevents capital destruction, but it also induces capital creation. Furthermore, under certain conditions, irreversibility raises the risk premium by increasing the variability of consumption and market portfolio. These issues are dealt in a simple model of investment irreversibility with multiple types of capital. Its tractability allows for analytical results which explain the contrast between the consequences of irreversibility for individual markets and the consequences of irreversibility for the whole economy. Copyright 2001 by Oxford University Press.

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Publisher Info
Article provided by Oxford University Press in its journal Economic Inquiry.

Volume (Year): 39 (2001)
Issue (Month): 4 (October)
Pages: 499-510
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Handle: RePEc:oup:ecinqu:v:39:y:2001:i:4:p:499-510

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Caplin, Andrew & Leahy, John V, 1993. "Sectoral Shocks, Learning, and Aggregate Fluctuations," Review of Economic Studies, Blackwell Publishing, vol. 60(4), pages 777-94, October. [Downloadable!] (restricted)
  2. Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Miquel Faig, 1999. "Asset Pricing, Growth, And The Business Cycle With Irreversible Investment," Working Papers faig-98-02, University of Toronto, Department of Economics. [Downloadable!]
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This page was last updated on 2009-11-19.

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