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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
A Unified Model of Investment Under Uncertainty
By Andrew B. Abel and Janice C. Eberly
-
Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods
By Sanford J. Grossman and Guy Laroque
-
The Effects of Irreversibility and Uncertainty on Capital Accumulation
By Andrew B. Abel and Janice C. Eberly
-
Irreversible Investment with Regime Shifts
By Xin Guo, Jianjun Miao, ...
-
Curtailing Intermittent Generation in Electrical Systems
By Owen Q. Wu and Roman Kapuscinski
-
Optimal Investment and Consumption with Fixed and Proportional Transaction Costs
By Hong Liu
-
The Optimal Management of Environmental Quality with Stock and Flow Controls
By Nathaniel O. Keohane, Benjamin Van Roy, ...
-
On the Relationship between Price and Capacity Decisions in Inventory Systems with Stochastic Demand
By Gad Allon and Assaf Zeevi