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Barriers and Optimal Investment

Jean-Daniel Saphores
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Jean-Daniel Saphores: University of California Irvine

GE, Growth, Math methods from EconWPA

Abstract: This paper analyzes the impact of different types of barriers on the decision to invest using a simple framework based on stochastic discount factors. Our intuitive approach proposes an alternative to the real options methodology that does not rely on the “smooth-pasting condition.” An application to MacDonald and Siegel’s canonical investment problem (1986) shows that the standard investment threshold over-estimates the optimal threshold when the lower barrier is absorbing and under-estimates it when the lower barrier is reflecting.

Keywords: investment; uncertainty; irreversibility; barriers; real options (search for similar items in EconPapers)
JEL-codes: D92 D81 E22 (search for similar items in EconPapers)
Date: 2004-10-13
Note: Type of Document - pdf; pages: 32
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