Irreversible investment and industry equilibrium (*)
Ioannis Karatzas () and
Fridrik Baldursson ()
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Ioannis Karatzas: Departments of Mathematics and Statistics, Columbia University, New York, N.Y. 10027, USA
Finance and Stochastics, 1996, vol. 1, issue 1, pages 69-89
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.
Keywords: Irreversible investment under uncertainty; industry equilibrium; optimality of myopic decisions; singular stochastic control; optimal stopping (search for similar items in EconPapers)
JEL-codes: E22 D92 G31 (search for similar items in EconPapers)
Note: received: April 1996; final version received: September 1996
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