Investment Demand When Economic Depreciation is Stochastic

Panos Fousekis and James Shortle

American Journal of Agricultural Economics, 1995, vol. 77, issue 4, 990-1000

Abstract: The neoclassical model of investment by a risk-neutral firm is generalized to include uncertainty about the rate of depreciation by replacing the deterministic capital accumulation identity with a stochastic variant. Ito's stochastic dynamic optimization is used to derive conditions for optimal investment. A nondegenerate steady-state distribution of the capital stock is shown to exist and is derived for the empirically important case of a normalized quadratic profit function and static price expectations. It is demonstrated for this case that uncertainty about the rate of depreciation decreases the expected steady-state capital stock and investment.

Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ajagec:v:77:y:1995:i:4:p:990-1000.

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