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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.(4-5): 831-852.

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