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Optimal Capital Policy With Irreversible Investment
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Book Synopsis Optimal Capital Policy with Irreversible Investment by : Kenneth Joseph Arrow
Download or read book Optimal Capital Policy with Irreversible Investment written by Kenneth Joseph Arrow and published by . This book was released on 1966 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper analyzes investment policy for a firm which cannot disinvest faster than its capital depreciates. The model discussed assumes that there is a single capital good and that the firm's profit is a time-varying function of the size of the capital stock. Using methods of mathematical control theory it is shown that the optimal policy consists of alternating regimes in which positive gross investment is or is not undertaken; prices are derived which can be used as a guide to correct policies. These results are contrasted with the case where disinvestment is allowed (that is, where capital goods can be bought or sold by the firm at a fixed price). An alogrithm for finding the intervals where investment will take place is presented. (Author).
Book Synopsis Irreversibility, Uncertainty, and Investment by : Robert S. Pindyck
Download or read book Irreversibility, Uncertainty, and Investment written by Robert S. Pindyck and published by World Bank Publications. This book was released on 1989 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Irreversible investment is especially sensitive to such risk factors as volatile exchange rates and uncertainty about tariff structures and future cash flows. If the goal of macroeconomic policy is to stimulate investment, stability and credibility may be more important than tax incentives or interest rates.
Book Synopsis Irreversible Investment, Managerial Discretion and Optimal Capital Structure by : Andreas Andrikopoulos
Download or read book Irreversible Investment, Managerial Discretion and Optimal Capital Structure written by Andreas Andrikopoulos and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We explore the significance of employee compensation and alternative (reservation) income on investment timing, endogenous default, yield spreads and capital structure. In a real-options setting, a manager's incentive to under (over) invest in a project is associated to labor income he has to forego in order to work on the project, the manager's salary, his stake on the project's equity capital and his subsequent income, should he decide to terminate operations. We find that the optimal level of coupon payments decreases with managerial salary and ownership stake while it is increasing in the manager's reservation income. Yield spreads (optimal leverage ratios) are increasing (decreasing) in the manager's salary and ownership stake, while they are decreasing (increasing) in the manager's reservation income. Exploring agency costs of debt as deviations from value-maximizing investment policy, we document a U-shaped relationship between agency costs of debt and the managerial compensation parameters.
Book Synopsis Irreversibility and Aggregate Investment by : Giuseppe Bertola
Download or read book Irreversibility and Aggregate Investment written by Giuseppe Bertola and published by . This book was released on 1991 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: Investment is often irreversible, in that installed capital has little or no value unless used in production. In the presence of ongoing uncertainty, an individual firm's irreversible investment policy optimally alternates short bursts of positive gross investment to periods of inaction, when the installed capital stock is allowed to depreciate. The behavior of aggregate investment series is characterized by sluggish, continuous adjustment instead. We argue in this paper that aggregate dynamics should be interpreted in terms of unsynchronized irreversible investment decisions by heterogenous firms, rather than in terms of ad-hoc adjustment cost functions in a representative-agent framework. We propose a closed-form solution for a realistic model of sequential irreversible investment, characterize the aggregate implications of microeconomic irreversibility and idiosyncratic uncertainty, and interpret U.S. data in light of the theoretical results.
Book Synopsis Irreversibility, Uncertainty, and Investment by : Robert S. Pindyck
Download or read book Irreversibility, Uncertainty, and Investment written by Robert S. Pindyck and published by . This book was released on 2010 with total page 75 pages. Available in PDF, EPUB and Kindle. Book excerpt: Most investment expenditures have two important characteristics: First, they are largely irreversible; the firm cannot disinvest, so the expenditures are sunk costs. Second, they can be delayed, allowing the firm to wait for new information about prices, costs, and other market conditions before committing resources. An emerging literature has shown that this has important implications for investment decisions, and for the determinants of investment spending. Irreversible investment is especially sensitive to risk, whether with respect to future cash flows, interest rates, or the ultimate cost of the investment. Thus if a policy goal is to stimulate investment, stability and credibility may be more important than tax incentives or interest rates. This paper presents some simple models of irreversible investment, and shows how optimal investment rules and the valuation of projects and firms can be obtained from contingent claims analysis, or alternatively from dynamic programming. It demonstrates some strengths and limitations of the methodology, and shows how the resulting investment rules depend on various parameters that come from the market environment. It also reviews a number of results and insights that have appeared in the literature recently, and discusses possible policy implications.
Book Synopsis Optimal Investment with Costly Reversibility by : Andrew B. Abel
Download or read book Optimal Investment with Costly Reversibility written by Andrew B. Abel and published by . This book was released on 1995 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: Investment is characterized by costly reversibility when a firm can purchase capital at a given price and sell capital at a lower price. We derive an explicit analytic solution for optimal investment by a firm facing costly reversibility. In addition, we derive a local approximation to the solution which highlights the effects of the parameters of the problem on the triggers for investment. More generally, we extend the Jorgensonian concept of the user cost of capital to the case of uncertainty and define cU and cL as the user costs of capital associated with the purchase and sale of capital, respectively. Optimality requires the" firm to purchase and sell capital as needed to keep the marginal revenue product of capital in" the closed interval [cU, cL]. This prescription encompasses the case of irreversible investment as well as the standard" neoclassical case of costlessly reversible investment. Finally, quantitative analysis suggests" that even when the difference between the purchase and sale prices of capital is small user costs associated with purchasing and selling capital are closer to those applicable under" complete irreversibility than to those applicable under costless reversibility."
Book Synopsis The Effects of Irreversibility and Uncertainty on Capital Accumulation by : Andrew B. Abel
Download or read book The Effects of Irreversibility and Uncertainty on Capital Accumulation written by Andrew B. Abel and published by . This book was released on 1995 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: When investment decisions cannot be reversed and returns to capital are uncertain, the firm faces a higher user cost of capital than if it could reverse its decisions. This higher user cost tends to reduce the firm's capital stock. Opposing this effect is the irreversibility constraint itself: when the constraint binds, the firm would like to sell capital but cannot. This effect tends to increase the firm's capital stock. We show that a firm with irreversible investment may have a higher or a lower expected capital stock, even in the long run, compared to an otherwise identical firm with reversible investment. Furthermore, an increase in uncertainty can either increase or decrease the expected long-run capital stock under irreversibility relative to that under reversibility. However, changes in the expected growth rate of demand, the interest rate, the capital share in output, and the price elasticity of demand all have unambiguous effects.
Book Synopsis Value, Capital and Growth by : Gabriel R. Ricci
Download or read book Value, Capital and Growth written by Gabriel R. Ricci and published by Routledge. This book was released on 2017-09-08 with total page 565 pages. Available in PDF, EPUB and Kindle. Book excerpt: Value, Capital and Growth was written as a mark of honor to Sir John Hicks on the occasion of his retirement as Drummond Professor of Political Economy at the University of Oxford. As the title implies, most of the essays are directed to the development of the three great topics of modern economic theory to which he contributed--Value, Capital, and Growth. More specifically, there are important papers on general equilibrium, aggregation, and index numbers-- all topics of deep interest in international economics.The volume is particularly noteworthy for a number of papers exploring hitherto unrealized implications of general equilibrium models. There are also several papers dealing with mathematical economics as they relate to trade and development, which will be of great interest to students of those fields. Few theorists possessed Hicks catholicity in economics and his interest in and appetite for all branches of applied economics, and especially comparative economic history. His interests ranged from Italian Renaissance banking to academic publishing and the export and import of scholarly works,The international eminence of the contributors and the quality of their work ensure that this volume is a fitting tribute to a great economist and that it will be studied carefully for many years. No effort was spared to present the work in a style and format worthy of the subject and of the occasion. The volume includes masterful contributions by Kenneth Arrow, Jagdish Bhagwati, Roy Harrod, Paul A. Samuelson, Robert M. Solow, and Alan A. Walters among others, and contains a full biographical and bibliographical data base on Hicks.J.N. Wolfe was professor of economics at the University of Edinburgh until his retirement.
Book Synopsis Production and Capital by : Kenneth Joseph Arrow
Download or read book Production and Capital written by Kenneth Joseph Arrow and published by Harvard University Press. This book was released on 1985 with total page 500 pages. Available in PDF, EPUB and Kindle. Book excerpt: Unlike the papers of some other great economists, those of Kenneth Arrow are being read and studied today with even greater care and attention than when they first appeared in the journals. The publication of his collected papers will therefore be welcomed by economists and other social scientists and in particular by graduate students, who can draw from them the deep knowledge and the discernment in selection of scientific problems that only a master can offer. The author has added headnotes to certain well-known papers, describing how he came to write them. The study of production is central to economic theory, and capital and its accumulation are two of the most interesting aspects of the modern production process. Capital may take the form of inventories of inputs, inventories of outputs, or machines and other fixed goods. The essential and unique aspect of all types of capital is that it must be accumulated as the result of prior stages of the production process. This gives the dynamic theory of production a recursive structure that can be exploited by economic analysis. The optimization of production under recursive conditions lends itself to general mathematical methods of dynamic programming and optimal control theory. This is the main theme of the essays included in this fifth volume of Kenneth Arrow's Collected Papers.
Book Synopsis Irreversible Investment with Uncertainty and Scale Economies by : Avinash Dixit
Download or read book Irreversible Investment with Uncertainty and Scale Economies written by Avinash Dixit and published by . This book was released on 2008 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyses optimal irreversible investment policy when profits are subject to a multiplicative geometric Brownian motion shock. The marginal product of capital is increasing initially and decreasing thereafter. In the latter range, optimal policy is familiar: capacity is added gradually as the shock rises to a threshold where the expected return on the marginal unit is a required multiple of the cost of capital. The multiple reflects the option value of waiting. The optimal policy in the increasing marginal product range obeys the same multiple, now applied to the total return on the discrete increase in capital. Implications for economic growth, and suboptimal equilibria under external economies, are examined.
Book Synopsis Value, Capital and Growth by : Gabriel R. Ricci
Download or read book Value, Capital and Growth written by Gabriel R. Ricci and published by Routledge. This book was released on 2017-11 with total page 563 pages. Available in PDF, EPUB and Kindle. Book excerpt: Cover -- Half Title -- Title Page -- Copyright Page -- Contents -- Introduction -- 1 Optimal Capital Policy with Irreversible Investment -- 2 Trade Liberalization among LDCS Trade Theory, and Gatt Rules -- 3 Income, Wealth, and the Theory of Consumption -- 4 Taste and Quality Change in the Pure Theory of the True Cost-of-Living Index -- 5 Measuring the Quantities of Fixed Factors -- 6 What is a Model? -- 7 Normal Backwardation -- 8 Wicksell on the Facts: -- 9 A Partial Theoretical Solution of the Problems of the Incidence of Import Duties -- 10 Time, Interest, and the Production Function -- 11 The Principle of Two-stage Maximization in Price Theory -- 12 Two Classical Monetary Models -- 13 Information and Period Analysis -- 14 On Hicksian Stability -- 15 Accumulation Programs of Maximum Utility and the von Neumann Facet -- 16 Free Trade and Development Economics -- 17 An Economic Test of Sir John Hicks's Theory of Biased Induced Inventions -- 18 Hicksian Stability, Currency Markets, and the Theory of Economic Policy -- 19 Two Generalizations of the Elasticity of Substitution -- 20 Short-run Adjustment of Employment to Output -- 21 Time Preference, the Consumption Function, and Optimum Asset Holdings -- 22 The Demand for Money Expectations and Short and Long Rates -- Sir John Hicks: biographical and bibliographical data -- List of works referred to
Book Synopsis Adjustment Costs, Irreversibility and Investment Patterns in African Manufacturing by : Mr.Arne Bigsten
Download or read book Adjustment Costs, Irreversibility and Investment Patterns in African Manufacturing written by Mr.Arne Bigsten and published by International Monetary Fund. This book was released on 1999-07-01 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines dynamic patterns of investment in Cameroon, Ghana, Kenya, Zambia and Zimbabwe, assessing the consistency of those patterns with different adjustment cost structures. Using survey data on manufactured firms, we document the importance of zero investment episodes and lumpy investment. The proportion of firms experiencing large investment spikes is significant in explaining aggregate manufacturing investment. Taken together, evidence from descriptive statistics, average investment regressions modeling the response to capital imbalance, and transition data analysis indicate that irreversibility is an important factor considered by firms when making investment plans. The picture is not unanimous however, and some explanations for the mixed results are proposed.
Book Synopsis Public Investment, the Rate of Return, and Optimal Fiscal Policy by : Kenneth J. Arrow
Download or read book Public Investment, the Rate of Return, and Optimal Fiscal Policy written by Kenneth J. Arrow and published by Routledge. This book was released on 2013-10-18 with total page 254 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book, co-authored by the Nobel-prized economist, Kenneth Arrow, considers public expenditures in the context of modern growth theory. It analyzes optimal growth with public capital. A theory of 'controllability' is developed and injected into public economics and growth models. Originally published in 1970
Book Synopsis Irreversible Investment with Regime Shifts by : Xin Guo
Download or read book Irreversible Investment with Regime Shifts written by Xin Guo and published by . This book was released on 2004 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: Under the real options approach to investment under uncertainty, agents formulate optimal policies under the assumption that firms' growth prospects do not vary over time. This paper proposes and solves a model of investment decisions in which the growth rate and volatility of the decision variable shift between different states at random times. A value-maximizing investment policy is derived such that in each regime the firm's investment policy is optimal and recognizes the possiblity of a regime shift. Under this policy, investment is intermittent and increases with marginal q. Moreover, the rate of investment typically is very small but exhibits some spurts of growth. Implications for marginal q and the user cost of capital are also examined.
Book Synopsis Optimal Firm Behaviour in the Context of Technological Progress and a Business Cycle by : Onno van Hilten
Download or read book Optimal Firm Behaviour in the Context of Technological Progress and a Business Cycle written by Onno van Hilten and published by Springer Science & Business Media. This book was released on 2013-03-14 with total page 237 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis is a theoretical study of the optimal dynamic policies of a, to some extent, slowly adjusting firm that faces an exogeneously given technological progress and an exogeneously given business cycle. It belongs to the area of mathematical economics. It is intended to appeal to mathematical economists in the first place, economists in the second place and mathematicians in the third place. It entails an attempt to stretch the limits of the application of deterministic dynamic optimisation to economics, in particular to firm behaviour. A well-known· Dutch economist (and trained mathematician) recently stated in 1 a local university newspaper that mathematical economists give economics a bad reputation, since they formulate their problems from a mathematical point of view and they are only interested in technical, mathematical problems. At the same time, however, "profound as economists may be, when it comes to extending or modifying the existing theory to make it applicable to a certain economic problem, an understanding of optimal control theory (which is the mathematical theory used in this thesis, ovh) based solely on heuristic arguments will often turn out to be inadequate" (SydS
Book Synopsis Investment: Tax policy and the cost of capital by : Dale Weldeau Jorgenson
Download or read book Investment: Tax policy and the cost of capital written by Dale Weldeau Jorgenson and published by MIT Press. This book was released on 1996 with total page 514 pages. Available in PDF, EPUB and Kindle. Book excerpt: V.1 Capital theory and investment behavior -- V.2 Tax policy and the cost of capital.
Book Synopsis Investment under Uncertainty by : Robert K. Dixit
Download or read book Investment under Uncertainty written by Robert K. Dixit and published by Princeton University Press. This book was released on 2012-07-14 with total page 484 pages. Available in PDF, EPUB and Kindle. Book excerpt: How should firms decide whether and when to invest in new capital equipment, additions to their workforce, or the development of new products? Why have traditional economic models of investment failed to explain the behavior of investment spending in the United States and other countries? In this book, Avinash Dixit and Robert Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made. In so doing, they answer important questions about investment decisions and the behavior of investment spending. This new approach to investment recognizes the option value of waiting for better (but never complete) information. It exploits an analogy with the theory of options in financial markets, which permits a much richer dynamic framework than was possible with the traditional theory of investment. The authors present the new theory in a clear and systematic way, and consolidate, synthesize, and extend the various strands of research that have come out of the theory. Their book shows the importance of the theory for understanding investment behavior of firms; develops the implications of this theory for industry dynamics and for government policy concerning investment; and shows how the theory can be applied to specific industries and to a wide variety of business problems.
