Download This PaperA Markup Interpretation of Optimal Rules for Irreversible Investment
17 Pages Posted: 8 Jul 2000 Last revised: 3 Apr 2008
Date Written: March 1997
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.
Suggested Citation: Suggested Citation
Avinash K. Dixit (Contact Author)
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
609-258-4000 (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 )
100 Main Street
Cambridge, MA 02139
United States
617-253-6641 (Phone)
617-258-6855 (Fax)
HOME PAGE: http://web.mit.edu/rpindyck/www/
Do you have a job opening that you would like to promote on SSRN?
Paper statistics
