Date of this Version
Journal of Economic Dynamics and Control
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.
© 1997. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Abel, A. B., & Eberly, J. C. (1997). An Exact Solution for the Investment and Market Value of Firm Facing Uncertainty, Adjustment Costs, and Irreversibility. Journal of Economic Dynamics and Control, 21 (4-5), 831-852. http://dx.doi.org/10.1016/S0165-1889(97)00005-5
Date Posted: 27 November 2017
This document has been peer reviewed.