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Irreversible investment and industry equilibrium (*)

  • Ioannis Karatzas

    ()

    (Departments of Mathematics and Statistics, Columbia University, New York, N.Y. 10027, USA)

  • Fridrik M. Baldursson

    ()

    (National Economic Institute and the Institute of Economic Studies, University of Iceland, Kalkofnsvegur 1, IS-150 Reykjavik, Iceland)

We establish the equivalence of competitive industry equilibrium with a central planner's decision problem under uncertainty, when investment is irreversible. The existence of industry equilibrium is derived, and it is shown that myopic behavior on the part of small agents is harmless, in the sense that it leads to the same decisions as full rational expectations do. Our model is set in continuous time and allows for very general forms of randomness. The methods are based on the probabilistic approach to singular stochastic control theory and its connections with optimal stopping problems.

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Article provided by Springer in its journal Finance and Stochastics.

Volume (Year): 1 (1996)
Issue (Month): 1 ()
Pages: 69-89

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Handle: RePEc:spr:finsto:v:1:y:1996:i:1:p:69-89
Note: received: April 1996; final version received: September 1996
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