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Instantaneous optimal investment decisions with costly and costless reversibility

Author

Listed:
  • Öner Günçavdi

    (Istanbul Technical University)

  • Seyidali S. Akhiev

    (Istanbul Technical University)

  • Andrew Mckay

    (University of Nottingham)

Abstract

While many different theories have been put forward to explain investment behaviour, they are all generally based on dynamic optimization, and there are a number of different methods available to solve such problems. In such models, the optimal values of the control and state variables, namely investment and the capital stock respectively, become forward-looking, dependent on the future values of prices of both output and the factors of production, and on the (unknown) end period value of the capital stock. In this paper we suggest a new method to obtain optimal investment levels without requiring information on the future, or end period conditions. Thus the optimal paths of control and state variables are obtained without needing to know future values of variables. Instead of maximizing the discounted value of the cash flows from unit capital accumulation over an unobservable future time interval as a performance index, the firm is assumed to maximize the current value of the cash flow of a unit capital accumulation at each time t.

Suggested Citation

  • Öner Günçavdi & Seyidali S. Akhiev & Andrew Mckay, 2007. "Instantaneous optimal investment decisions with costly and costless reversibility," EconoQuantum, Revista de Economia y Finanzas, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 3(2), pages 71-88, Enero-Jun.
    • Handle: RePEc:qua:journl:v:3:y:2007:i:2:p:71-88
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    References listed on IDEAS

    as
    1. Mussa, Michael L, 1977. "External and Internal Adjustment Costs and the Theory of Aggregate and Firm Investment," Economica, London School of Economics and Political Science, vol. 44(174), pages 163-178, May.
    2. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521331586.
    3. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321.
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    More about this item

    Keywords

    Economics; investment; analysis.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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