Stochastic Depreciation and Optimal Consumption-Investment Decisions
Huw Rhys and
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Huw Rhys: University of Wales, Aberystwyth,
Journal of Business Finance & Accounting, 2002, vol. 29, issue 1&2, 273-286
Capital accumulation is viewed as the net outcome of accumulation and wasting. Accumulation is modelled by a Gaussian process whilst wasting is generated by a continuous time and continuous state-space pseudo-Poisson process. These assumptions imply that an economic agent's preferences, consumption, capital accumulation and wastage are governed by a form of Hamilton-Jacobi-Bellman equation containing an infinite number of terms. We demonstrate the optimisation procedures applicable to consumption and the expected wastage of capital and in the process show that isoelastic preferences are consistent with the model. Copyright Blackwell Publishers Ltd 2002.
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