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Optimal investment with lumpy costs

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Listed author(s):
  • Le, Duc Thuc
  • Jones, John Bailey

Abstract

In this paper we solve a continuous-time model of investment with uncertainty, irreversibility and a broad class of lumpy adjustment costs. In addition to being general, our solution is quite tractable and intuitive. We show that, in contrast to standard results, the marginal value of capital jumps when investment is undertaken. We also find that firms facing higher uncertainty let their capital stock depreciate further before they invest, but increase their capital by a similar proportion once they do invest. We extend both the user cost and q theories of investment to incorporate lumpy investment. We confirm that with lumpy investment, a variant of Tobin's q can be a better predictor of investment than marginal q.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 29 (2005)
Issue (Month): 7 (July)
Pages: 1211-1236

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Handle: RePEc:eee:dyncon:v:29:y:2005:i:7:p:1211-1236
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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Cited by:

  1. Gökgöz, Fazıl & Atmaca, Mete Emin, 2017. "Portfolio optimization under lower partial moments in emerging electricity markets: Evidence from Turkey," Renewable and Sustainable Energy Reviews, Elsevier, vol. 67(C), pages 437-449.
  2. Fabio Verona, 2014. "Investment Dynamics with Information Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1627-1656, December.
  3. Kort, Peter M. & Murto, Pauli & Pawlina, Grzegorz, 2010. "Uncertainty and stepwise investment," European Journal of Operational Research, Elsevier, vol. 202(1), pages 196-203, April.

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