Research Details

Abstract

We characterize a firm's optimal factor adjustment when any number of factors faced "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 shoudl 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.

Type

Article

Author(s)

Janice C. Eberly, Jan A. Van Mieghem

Date Published

1997

Citations

Eberly, Janice C., and Jan A. Van Mieghem. 1997. Multifactor Dynamic Investment Under Uncertainty. Journal of Economic Theory.(8): 345-387.