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Technical change and irreversible investment under risk

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  • Javier Mario Ekboir

Abstract

A stochastic dynamic model was constructed to analyze investment decisions of an individual farme under risk in the presence of legibilities, embedded technical change and indivisible capital. An analytical solution was obtained and its local behavior studied by numerical methods. Optimal investment is obtained by regulating the difference between the desired and actual capital stocks between two barriers that define an inaction interval. While the desired capital drifts between the barriers, no action is taken. If the desired capital touches the upper barrier, the farmer invests pushing the average efficiency of the actual capital stock up. This in turn raises the desired capital even higher and contracts the inaction interval. If these effects are strong enough, the farmer will invest again until the potential gains of the technological package are exhausted. If the desired capital falls enough, the farmer disinvests, pushing down the average productivity and expanding the inaction interval. Disinvestment continues until it slops either because the inaction interval becomes so wide that it is no longer optimal to disinvest or because the actual capital stock is so small that it is no longer profitable to produce.

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  • Javier Mario Ekboir, 1997. "Technical change and irreversible investment under risk," Agricultural Economics, International Association of Agricultural Economists, vol. 16(1), pages 55-65, March.
    • Handle: RePEc:bla:agecon:v:16:y:1997:i:1:p:55-65
    DOI: 10.1111/j.1574-0862.1997.tb00441.x
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    Cited by:

    1. Xian, Hui & Colson, Gregory & Mei, Bin & Wetzstein, Michael E., 2015. "Co-firing coal with wood pellets for U.S. electricity generation: A real options analysis," Energy Policy, Elsevier, vol. 81(C), pages 106-116.
    2. Tzouramani, Irene & Mattas, Konstadinos, 2002. "Employing Real Options Methodology for Decision Making in Greenhouse Technology," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24835, European Association of Agricultural Economists.
    3. Tsui-Yii Shih, 2008. "The determinate effects of competences and decision process factors on firms' internationalisation," The Service Industries Journal, Taylor & Francis Journals, vol. 30(14), pages 2329-2350, November.
    4. Trappey, Charles V. & Shih, Tsui-Yii & Trappey, Amy J.C., 2007. "Modeling international investment decisions for financial holding companies," European Journal of Operational Research, Elsevier, vol. 180(2), pages 800-814, July.

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