A Dynamic Model of Investment and Capacity Utilization

Andrew B. Abel

The Quarterly Journal of Economics, 1981, vol. 96, issue 3, 379-403

Abstract: This paper develops a dynamic optimizing model of a firm with quasi-fixed factors subject to adjustment costs. The utilization rates of the quasi-fixed factors are chosen optimally by the firm, and the rates of investment in the quasi-fixed factors are based on the shadow prices of these factors, in the spirit of Tobin's q theory of investment. Capital investment is shown to be negatively related to capital utilization along the path to the steady state; however, in response to unanticipated demand shocks, capital utilization and investment are positively related.

Date: 1981
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