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research article

Irreversible investment with regime shifts

Morellec, Erwan  
•
Guo, Xin
•
Miao, Jianjun
2005
Journal of Economic Theory

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 possibility of a regime shift. Under this policy, investment is intermittent and increases with marginal q. Moreover, investment typically is very small but, in some states, the capital stock jumps. Implications for marginal q and the user cost of capital are also examined.

  • Details
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Type
research article
DOI
10.1016/j.jet.2004.04.005
Author(s)
Morellec, Erwan  
Guo, Xin
Miao, Jianjun
Date Issued

2005

Published in
Journal of Economic Theory
Volume

122

Issue

1

Start page

37

End page

59

Subjects

Investment

•

Capacity choice

•

Regime shifts

Note

Examines the effects of macroeconomic conditions on optimal investment policies.

Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-EM  
Available on Infoscience
April 24, 2010
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/49658
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