Multi-Factor Dynamic Investment Under Uncertainty

43 Pages Posted: 14 Dec 2013

Date Written: November 24, 1996

Abstract

We characterize a firm's optimal factor adjustment when any number of factors face "kinked" linear adjustment costs so that all factor accumulation is costly to reverse. We first consider a general non-stationary case with a concave operating profit function, unrestricted form of uncertainty and a horizon of arbitrary length. We show that the optimal investment strategy follows a control limit policy at each point in time. The state space of the firm's problem is partitioned into various domains, including a continuation region where no adjustment should optimally be made to factor levels. We then consider two specific model classes and exploit their special structure to derive expressions for their continuation regions.

JEL Classification: D92, E22, E24

Suggested Citation

Eberly, Janice C. and Van Mieghem, Jan Albert, Multi-Factor Dynamic Investment Under Uncertainty (November 24, 1996). Journal of Economic Theory, Vol. 75, No. 8, 1997, Available at SSRN: https://ssrn.com/abstract=2366959

Janice C. Eberly

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1840 (Phone)
847-491-5719 (Fax)

Jan Albert Van Mieghem (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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