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Optimal investment decision under switching regimes of subsidy support

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  • Oliveira, Carlos
  • Perkowski, Nicolas

Abstract

We address the problem of making a managerial decision when the investment project is subsidized, which results in the resolution of an infinite-horizon optimal stopping problem of a switching diffusion driven by either a homogeneous or an inhomogeneous continuous-time Markov chain. We provide a characterization of the value function (and optimal strategy) of the optimal stopping problem. On the one hand, broadly, we can prove that the value function is the unique viscosity solution to a system of HJB equations. On the other hand, when the Markov chain is homogeneous and the switching diffusion is one-dimensional, we obtain stronger results: the value function is the difference between two convex functions.

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  • Oliveira, Carlos & Perkowski, Nicolas, 2020. "Optimal investment decision under switching regimes of subsidy support," European Journal of Operational Research, Elsevier, vol. 285(1), pages 120-132.
    • Handle: RePEc:eee:ejores:v:285:y:2020:i:1:p:120-132
    DOI: 10.1016/j.ejor.2019.02.019
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    References listed on IDEAS

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    11. Boomsma, Trine Krogh & Meade, Nigel & Fleten, Stein-Erik, 2012. "Renewable energy investments under different support schemes: A real options approach," European Journal of Operational Research, Elsevier, vol. 220(1), pages 225-237.
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    Cited by:

    1. Li, Mingyang & Jin, Man & Kumbhakar, Subal C., 2022. "Do subsidies increase firm productivity? Evidence from Chinese manufacturing enterprises," European Journal of Operational Research, Elsevier, vol. 303(1), pages 388-400.
    2. Gaïgi, M’hamed & Ly Vath, Vathana & Scotti, Simone, 2022. "Optimal harvesting under marine reserves and uncertain environment," European Journal of Operational Research, Elsevier, vol. 301(3), pages 1181-1194.
    3. D'Auria, Bernardo & Salmerón Garrido, José Antonio, 2022. "An anticipative Markov modulated market," DES - Working Papers. Statistics and Econometrics. WS 34083, Universidad Carlos III de Madrid. Departamento de Estadística.

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