An exact solution for the investment and value of a firm facing uncertainty, adjustment costs, and irreversibility

Andrew B. Abel*, Janice C. Eberly

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

50 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)831-852
Number of pages22
JournalJournal of Economic Dynamics and Control
Volume21
Issue number4-5
DOIs
StatePublished - May 1997

Keywords

  • Investment
  • Irreversibility

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

Fingerprint Dive into the research topics of 'An exact solution for the investment and value of a firm facing uncertainty, adjustment costs, and irreversibility'. Together they form a unique fingerprint.

Cite this