UNDERSTANDING INVESTMENT IRREVERSIBILITY IN GENERAL EQUILIBRIUM

Miquel Faig

Working Papers from University of Toronto, Department of Economics

Abstract: This paper advances a tractable model designed to understand investment irreversibility in general equilibrium. The tractability of the model allows analytical results which explain the contrast, emphasized in the extant literature (e.g., Coleman [1997]), between the consequences of irreversibility for individual firms and the consequences of irreversibility for the whole economy. In general equilibrium, irreversibility affects both the wealth of consumers and the return on assets. In the model explored, as long as the inter-temporal elasticity of substitution is realistically low (less than one), investment irreversibility not only prevents capital destruction, but it also induces capital creation. Furthermore, under certain conditions, irreversibility raises the risk premium by increasing the variability of both consumption and the market portfolio.

Keywords: Irreversible Investment; Stochastic Growth; Asset Pricing (search for similar items in EconPapers)
JEL-codes: E22 E32 G12 (search for similar items in EconPapers)
Pages: 33 pages
Date: 1998-07-11
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Understanding Investment Irreversibility in General Equilibrium (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:tor:tecipa:faig-98-01

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