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A Unified Model of Investment Under Uncertainty, American Economic Review

Abstract

This paper extends the theory of investment under uncertainty to incorporate fixed costs of investment, a wedge between the purchase price and sale price of capital, and potential irreversibility of investment. In this extended framework, investment is a nondecreasing function of q, the shadow price of installed capital. The optimal rate of investment is in one of three regimes (positive, zero, or negative gross investment), depending on the value of q relative to two critical values. In general however, the shadow price q is not directly observable, so we present two examples relating q to observable variables.

Type

Article

Author(s)

Andrew B Abel, Janice C. Eberly

Date Published

1994

Citations

Abel, B Andrew, and Janice C. Eberly. 1994. A Unified Model of Investment Under Uncertainty. American Economic Review. 84(5): 1369-1384.

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