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Optimal investment with lumpy costs

  • Le, Duc Thuc
  • Jones, John Bailey

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
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