Barriers and Optimal Investment
AbstractThis paper analyzes the impact of different types of barriers on the decision to invest using a simple framework based on stochastic discount factors. Our intuitive approach proposes an alternative to the real options methodology that does not rely on the “smooth-pasting condition.” An application to MacDonald and Siegel’s canonical investment problem (1986) shows that the standard investment threshold over-estimates the optimal threshold when the lower barrier is absorbing and under-estimates it when the lower barrier is reflecting.
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Bibliographic InfoPaper provided by EconWPA in its series GE, Growth, Math methods with number 0410009.
Length: 32 pages
Date of creation: 13 Oct 2004
Date of revision:
Note: Type of Document - pdf; pages: 32
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investment; uncertainty; irreversibility; barriers; real options;
Find related papers by JEL classification:
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-10-21 (All new papers)
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.:
- William A. Brock & Michael Rothschild & Joseph E. Stiglitz, 1982. "Stochastic Capital Theory I. Comparative Statics," NBER Technical Working Papers 0023, National Bureau of Economic Research, Inc.
- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
- Dixit, Avinash & Pindyck, Robert S & Sodal, Sigbjorn, 1999. "A Markup Interpretation of Optimal Investment Rules," Economic Journal, Royal Economic Society, vol. 109(455), pages 179-89, April.
- Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
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