IDEAS home Printed from https://ideas.repec.org/a/spr/finsto/v1y1996i1p69-89.html
   My bibliography  Save this article

Irreversible investment and industry equilibrium (*)

Author

Listed:
  • Ioannis Karatzas

    (Departments of Mathematics and Statistics, Columbia University, New York, N.Y. 10027, USA)

  • Fridrik M. Baldursson

    (National Economic Institute and the Institute of Economic Studies, University of Iceland, Kalkofnsvegur 1, IS-150 Reykjavik, Iceland)

Abstract

We establish the equivalence of competitive industry equilibrium with a central planner's decision problem under uncertainty, when investment is irreversible. The existence of industry equilibrium is derived, and it is shown that myopic behavior on the part of small agents is harmless, in the sense that it leads to the same decisions as full rational expectations do. Our model is set in continuous time and allows for very general forms of randomness. The methods are based on the probabilistic approach to singular stochastic control theory and its connections with optimal stopping problems.

Suggested Citation

  • Ioannis Karatzas & Fridrik M. Baldursson, 1996. "Irreversible investment and industry equilibrium (*)," Finance and Stochastics, Springer, vol. 1(1), pages 69-89.
    • Handle: RePEc:spr:finsto:v:1:y:1996:i:1:p:69-89
    Note: received: April 1996; final version received: September 1996
    as

    Download full text from publisher

    File URL: http://link.springer.de/link/service/journals/00780/papers/6001001/60010069.pdf
    Download Restriction: Access to the full text of the articles in this series is restricted
    File URL: http://link.springer.de/link/service/journals/00780/papers/6001001/60010069.ps.gz
    Download Restriction: Access to the full text of the articles in this series is restricted
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Irreversible investment under uncertainty; industry equilibrium; optimality of myopic decisions; singular stochastic control; optimal stopping;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:finsto:v:1:y:1996:i:1:p:69-89. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.