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Optimal investment policy with fixed adjustment costs and complete irreversibility

  • Nicolas Roys


    (Institute for Fiscal Studies and University of Wisconsin)

We develop and solve analytically an investment model with fixed adjust-ment costs and complete irreversibility that reproduces observed investment dynamics at the micro-level. We impose a minimal set of restrictions on technology and uncertainty. Most of the results duplicate or generalize earlier findings that have been established either by simulations or under contrefactual assumptions.

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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP29/07.

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Date of creation: Nov 2007
Date of revision:
Handle: RePEc:ifs:cemmap:29/07
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  3. R. Gaston Gelos & Alberto Isgut, 2001. "Fixed Capital Adjustment: Is Latin America Different?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 717-726, November.
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  6. Rüdiger Bachmann & Christian Bayer, 2011. "Investment Dispersion and the Business Cycle," NBER Working Papers 16861, National Bureau of Economic Research, Inc.
  7. Øivind Anti Nilsen & Fabio Schiantarelli, 2003. "Zeros and Lumps in Investment: Empirical Evidence on Irreversibilities and Nonconvexities," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1021-1037, November.
  8. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  9. Oivind A. Nilsen & Kjell G. Salvanes & Fabio Schiantarelli, 2003. "Employment Changes, the Structure of Adjustment Costs, and Plant Size," Boston College Working Papers in Economics 586, Boston College Department of Economics.
  10. Virgiliu Midrigan & Daniel Yi Xu, 2014. "Finance and Misallocation: Evidence from Plant-Level Data," American Economic Review, American Economic Association, vol. 104(2), pages 422-58, February.
  11. Mark Doms & Timothy Dunne, 1994. "Capital Adjustment Patterns in Manufacturing Plants," Working Papers 94-11, Center for Economic Studies, U.S. Census Bureau.
  12. Andrew B. Abel & Janice C. Eberly, . "A Unified Model of Investment Under Uncertainty," Rodney L. White Center for Financial Research Working Papers 14-93, Wharton School Rodney L. White Center for Financial Research.
  13. Ruediger Bachmann & Ricardo J. Caballero & Eduardo M.R.A. Engel, 2006. "Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model," NBER Working Papers 12336, National Bureau of Economic Research, Inc.
  14. Ackerberg, Daniel & Lanier Benkard, C. & Berry, Steven & Pakes, Ariel, 2007. "Econometric Tools for Analyzing Market Outcomes," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 63 Elsevier.
  15. Caballero, R.J., 1996. "Fixed Costs: The Demise of Marginal q," Working papers 96-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Bajari, Patrick & Benkard, C. Lanier & Levin, Jonathan, 2007. "Estimating Dynamic Models of Imperfect Competition," Research Papers 1852r1, Stanford University, Graduate School of Business.
  17. Cogan, John F, 1981. "Fixed Costs and Labor Supply," Econometrica, Econometric Society, vol. 49(4), pages 945-63, June.
  18. Bayraktar, Nihal & Sakellaris, Plutarchos & Vermeulen, Philip, 2005. "Real versus financial frictions to capital investment," Working Paper Series 0566, European Central Bank.
  19. Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-32, May.
  20. Sanford J. Grossman & Guy Laroque, 1987. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," NBER Working Papers 2369, National Bureau of Economic Research, Inc.
  21. Abel, Andrew B. & Eberly, Janice C., 1998. "The mix and scale of factors with irreversibility and fixed costs of investment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 101-135, June.
  22. Amir, Rabah, 1997. "A new look at optimal growth under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 67-86, November.
  23. George Hall & John Rust, 2007. "The (S,s) Policy is an Optimal Trading Strategy in a Class of Commodity Price Speculation Problems," Economic Theory, Springer, vol. 30(3), pages 515-538, March.
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