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Optimal investment policy with fixed adjustment costs and complete irreversibility

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  • Roys, Nicolas

Abstract

We develop and characterize analytically an investment model in discrete time with a fixed adjustment cost not proportional to existing capital and complete irreversibility that reproduces the lumpiness of investment at the micro-level. In agreement with the empirical evidence, as a firm size increases, investment becomes less lumpy. The optimal policy is of the generalized (S,s) form.

Suggested Citation

  • Roys, Nicolas, 2014. "Optimal investment policy with fixed adjustment costs and complete irreversibility," Economics Letters, Elsevier, vol. 124(3), pages 416-419.
    • Handle: RePEc:eee:ecolet:v:124:y:2014:i:3:p:416-419
    DOI: 10.1016/j.econlet.2014.06.026
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    Cited by:

    1. Elsby, Michael W.L. & Michaels, Ryan, 2019. "Fixed adjustment costs and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 128-147.

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    More about this item

    Keywords

    Investment; Adjustment costs; Irreversibility; Dynamic programming;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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