A Unified Model of Investment under Uncertainty

Andrew Abel and Janice Eberly

American Economic Review, 1994, vol. 84, issue 5, 1369-84

Abstract: This paper extends the theory of investment under uncertainty to incorporate fixed costs of investment, a wedge between the purchase price and sale price of capital, and potential irreversibility of investment. In this extended framework, investment is a nondecreasing function of q, the shadow price of installed capital. The optimal rate of investment is in one of three regimes (positive, zero, or negative gross investment), depending on the value of q relative to two critical values. In general, however, the shadow price q is not directly observable, so the authors present two examples relating q to observable variables. Copyright 1994 by American Economic Association.

Date: 1994
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Related works:
Working Paper: A Unified Model of Investment Under Uncertainty (1993)
Working Paper: A Unified Model of Investment Under Uncertainty
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