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Inattentive Capital Investment with Nonconvex Costs

Author

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  • Xiaowen Wang

    (China Economic Research Institute, Liaoning University)

Abstract

This paper extends Sargent's adaptation of Lucas and Prescott's model of investment under uncertainty within a competitive industrial equilibrium. In this framework, firms incur capital costs proportional to adjustment size and make investment decisions amid rational inattention. Equilibrium analysis reveals that aggregate investment then exhibits partial adjustment, with individual firms adjusting investments infrequently based on an optimal probability and with fixed costs. Additionally, in a general equilibrium setting, marginal q increases with the degree of rational inattention, while the relationship between Tobin's q and the optimal investment rate under state uncertainty remains ambiguous.

Suggested Citation

  • Xiaowen Wang, 2025. "Inattentive Capital Investment with Nonconvex Costs," Annals of Economics and Finance, Society for AEF, vol. 26(1), pages 389-413, May.
    • Handle: RePEc:cuf:journl:y:2025:v:26:i:1:wang
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    More about this item

    Keywords

    Rational Inattention; Uncertainty; Investment; Adjustment Cost; Asset Pricing;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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