Inattentive Capital Investment with Nonconvex Costs

Xiaowen Wang ()
Additional contact information
Xiaowen Wang: China Economic Research Institute, Liaoning University

Annals of Economics and Finance, 2025, vol. 26, issue 1, 389-413

Abstract: This paper extends Sargent's adaptation of Lucas and Prescott's model of investment under uncertainty within a competitive industrial equilibrium. In this framework, firms incur capital costs proportional to adjustment size and make investment decisions amid rational inattention. Equilibrium analysis reveals that aggregate investment then exhibits partial adjustment, with individual firms adjusting investments infrequently based on an optimal probability and with fixed costs. Additionally, in a general equilibrium setting, marginal q increases with the degree of rational inattention, while the relationship between Tobin's q and the optimal investment rate under state uncertainty remains ambiguous.

Keywords: Rational Inattention; Uncertainty; Investment; Adjustment Cost; Asset Pricing (search for similar items in EconPapers)
JEL-codes: D83 E22 E23 G12 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://down.aefweb.net/AefArticles/aef260110Wang.pdf (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:cuf:journl:y:2025:v:26:i:1:wang

Access Statistics for this article

Annals of Economics and Finance is currently edited by Heng-fu Zou

More articles in Annals of Economics and Finance from Society for AEF Contact information at EDIRC.
Bibliographic data for series maintained by Qiang Gao ().