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Research Details
An Exact Solution for the Investment and Value of a Firm Facing Uncertainty, Adjustment Costs, and Irreversibility, Journal of Economic Dynamics and Control
Abstract
This paper derives closed-form solutions for the investment and value of a competitive firm with a constant-returns-to-scale production function and convex costs of adjustment. Solutions are derived for the case of irreversible investment as well as for reversible investment. Optimal investment is a non-decreasing function of q, the shadow value of capital. Relative to the case of reversible investment, the introduction of irreversibility does not affect q, but it reduces the fundamental value of the firm.
Type
Article
Author(s)
Andrew B Abel, Janice C. Eberly
Date Published
1997
Citations
Abel, Andrew B, and Janice C. Eberly. 1997. An Exact Solution for the Investment and Value of a Firm Facing Uncertainty, Adjustment Costs, and Irreversibility. Journal of Economic Dynamics and Control. 21(4-5): 831-852.