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Optimal capital accumulation under price uncertainty and costly reversibility

  • Alvarez, Luis H.R.

We consider the optimal capital accumulation policy of a competitive firm operating in the presence of decreasing returns to scale, price uncertainty, and costly reversibility of investment. We characterize the optimal accumulation policy and derive the value of the firm by focusing on the marginal investment decision and solving the associated optimal timing problem characterizing the option value of the associated opportunity to either disinvest or acquire a marginal unit of capacity. We also characterize the required exercise premia associated with the optimal policies and demonstrate that hysteresis prevails within this class of accumulation problems as well.

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

Volume (Year): 35 (2011)
Issue (Month): 10 (October)
Pages: 1769-1788

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:10:p:1769-1788
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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