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Barriers and Optimal Investment

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Author Info
Jean-Daniel Saphores (University of California Irvine)
Abstract

This 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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File URL: http://129.3.20.41/eps/ge/papers/0410/0410009.pdf
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Paper provided by EconWPA in its series GE, Growth, Math methods with number 0410009.

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Length: 32 pages
Date of creation: 13 Oct 2004
Date of revision:
Handle: RePEc:wpa:wuwpge:0410009

Note: Type of Document - pdf; pages: 32
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Web page: http://129.3.20.41

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Related research
Keywords: investment; uncertainty; irreversibility; barriers; real options;

Find related papers by JEL classification:
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity

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References listed on IDEAS
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  1. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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