Date of this Version
International Economic Review
This paper presents closed-form solutions for the investment and valuation of a competitive firm with a Cobb-Douglas production function and a constant elasticity adjustment cost function in the presence of stochastic prices for output and inputs. The value of the firm is a linear function of the capital stock. The optimal rate of investmentis an increasing function of the slope of the value function with respect to the capital stock (marginal q). A mean preserving spread of the distribution of future price increases investment. An increase in the scale of the random component of a price can increase, decrease or not affect the rate of investment depending on the sign of the covariance of this price with a weighted average of all prices.
This is the peer reviewed version of the following article: [FULL CITE], which has been published in final form at http://dx.doi.org/10.2307/2526585. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms
Abel, A. B. (1985). A Stochastic Model of Investment, Marginal q and the Market Value of the Firm. International Economic Review, 26 (2), 305-322. http://dx.doi.org/10.2307/2526585
Date Posted: 27 November 2017
This document has been peer reviewed.