Abstract

http://ssrn.com/abstract=225750
 
 

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A Markup Interpretation of Optimal Rules for Irreversible Investment


Avinash Dixit


Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Robert S. Pindyck


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Sigbjorn Sodal


Agder University College

March 1997

NBER Working Paper No. w5971

Abstract:     
We re-examine the basic investment problem of deciding when to incur a sunk cost to obtain a stochastically fluctuating benefit. The optimal investment rule satisfies a trade-off between a larger versus a later net benefit; we show that this trade-off is closely analogous to the standard trade-off for the pricing decision of a firm that faces a downward sloping demand curve. We reinterpret the optimal investment rule as a markup formula involving an elasticity that has exactly the same form as the formula for a firm's optimal markup of price over marginal cost. This is illustrated with several examples.

Number of Pages in PDF File: 17

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Date posted: July 8, 2000  

Suggested Citation

Dixit, Avinash and Pindyck, Robert S. and Sodal, Sigbjorn, A Markup Interpretation of Optimal Rules for Irreversible Investment (March 1997). NBER Working Paper No. w5971. Available at SSRN: http://ssrn.com/abstract=225750

Contact Information

Avinash K. Dixit (Contact Author)
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
609-258-4013 (Phone)
609-258-6419 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
HOME PAGE: http://www.CESifo.de
Robert S. Pindyck
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
50 Memorial Drive, E52-450
Cambridge, MA 02142
United States
617-253-6641 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Sigbjorn Sodal
Agder University College ( email )
Dept. of Economics
4601 Kristiansand
Norway
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