Optimal capital accumulation under price uncertainty and costly reversibility

Luis Alvarez

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 10, 1769-1788

Abstract: We consider the optimal capital accumulation policy of a competitive firm operating in the presence of decreasing returns to scale, price uncertainty, and costly reversibility of investment. We characterize the optimal accumulation policy and derive the value of the firm by focusing on the marginal investment decision and solving the associated optimal timing problem characterizing the option value of the associated opportunity to either disinvest or acquire a marginal unit of capacity. We also characterize the required exercise premia associated with the optimal policies and demonstrate that hysteresis prevails within this class of accumulation problems as well.

Keywords: Price; uncertainty; Capital; accumulation; Costly; reversibility; Expansion; options; Disinvestment; opportunity; Hysteresis (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:10:p:1769-1788

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