Irreversible investment
نویسنده
چکیده
Investment is often irreversible: once installed, capital has little or no value unless used in production. This paper proposes, solves and characterizes a model of sequential irreversible investment by a firm facing uncertainty in technology, demand and price of capital. The solution can be found in closed form if simple (but not totally unrealistic) functional forms are assumed, and can be given an optimal stopping interpretation. The marginal revenue product of capital that induces additional investment is higher, under irreversibility, than the conventionally measured user cost of capital. In ergodic steady state, however, the former quantity is on average lower than the latter. 1998 Academic Press Limited
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