Multi-factor dynamic investment under uncertainty

Janice C. Eberly*, Jan A. Van Mieghem

*Corresponding author for this work

Research output: Contribution to journalArticle

81 Scopus citations

Abstract

We characterize a firm's optimal factor adjustment when any number of factors face "kinked" linear adjustment costs so that all factor accumulation is costly to reverse. We first consider a general non-stationary case with a concave operating profit function, unrestricted form of uncertainty and a horizon of arbitrary length. We show that the optimal investment strategy follows a control limit policy at each point in time. The state space of the firm's problem is partitioned into various domains, including a continuation region where no adjustment should optimally be made to factor levels. We then consider two specific model classes and exploit their special structure to derive expressions for their continuation regions.Journal of Economic LiteratureClassification Numbers: D92, E22, E24.

Original languageEnglish (US)
Pages (from-to)345-387
Number of pages43
JournalJournal of Economic Theory
Volume75
Issue number2
DOIs
StatePublished - Aug 1 1997

ASJC Scopus subject areas

  • Economics and Econometrics

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