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Irreversible Investments Revisited

  • Sandal, Leif Kristoffer

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Steinshamn, Stein Ivar

    ()

    (Institute for Research in Economics and Business Administration (SNF ))

A non-linear dynamic model in two state variables, two controls and three cost terms is presented for the purpose of finding the optimal combination of exploitation and capital investment in optimal renewable resource management. Non-malleability of capital is, in other words, incorporated in the model through an asymmetric convex cost-function of investment, and investments can be both positive and negative. Exploitation is controlled through the utilisation rate of available capital. A novel feature in this model is that there are fixed costs associated with the available capital whether it is utilised or not. In contrast to most of the previous literature both state variables enter the objective function.

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File URL: http://hdl.handle.net/11250/163866
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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2006/11.

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Length: 20 pages
Date of creation: 11 Oct 2006
Date of revision:
Handle: RePEc:hhs:nhhfms:2006_011
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  1. Boyce John R., 1995. "Optimal Capital Accumulation in a Fishery: A Nonlinear Irreversible Investment Model," Journal of Environmental Economics and Management, Elsevier, vol. 28(3), pages 324-339, May.
  2. Brunner, Martin & Strulik, Holger, 2002. "Solution of perfect foresight saddlepoint problems: a simple method and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 737-753, May.
  3. Clark, Colin W & Clarke, Frank H & Munro, Gordon R, 1979. "The Optimal Exploitation of Renewable Resource Stocks: Problems of Irreversible Investment," Econometrica, Econometric Society, vol. 47(1), pages 25-47, January.
  4. McKelvey, Robert, 1985. "Decentralized regulation of a common property renewable resource industry with irreversible investment," Journal of Environmental Economics and Management, Elsevier, vol. 12(4), pages 287-307, December.
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