EconPapers    
Economics at your fingertips  
 

Investment and Hysteresis

Avinash Dixit ()

Journal of Economic Perspectives, 1992, vol. 6, issue 1, 107-132

Abstract: It seems that firms behave contrary to the standard economic theory of investment. We observe that firms do not invest as soon a price rises above long-run average cost; instead firms wait until price rises substantially above long-run average cost. On the downside, firms stay in business for lengthy periods while absorbing operating losses, and price can fall substantially below average variable cost without inducing disinvestment or exit. Recent developments in the theory of investment under uncertainty offer an interesting new explanation. The new approach builds on an interesting analogy between real investments and options in financial markets: In the timing of investment, waiting has positive value because time brings more information about the future prospects of a project. This new approach suggests that textbook pictures of the dynamics of a competitive industry need to be substantially redrawn. More generally, it says that a great deal of inertia is optimal when dynamic decisions are being made in an uncertain environment.

JEL-codes: D92 (search for similar items in EconPapers)
Date: 1992
Note: DOI: 10.1257/jep.6.1.107
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (307) Track citations by RSS feed

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/jep.6.1.107 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:jecper:v:6:y:1992:i:1:p:107-32

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

Journal of Economic Perspectives is currently edited by Enrico Moretti

More articles in Journal of Economic Perspectives from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().

 
Page updated 2020-01-21
Handle: RePEc:aea:jecper:v:6:y:1992:i:1:p:107-32