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Optimal Investment with Lumpy Costs

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  • John Bailey Jones
  • Duc T. Le

Abstract

In this paper we solve a continuous-time model of investment with uncertainty, irreversibility and a broad class of lumpy adjustment costs. In addition to being general, our solution is quite tractable and intuitive. We show that, in contrast to standard results, the marginal value of capital jumps when investment is undertaken. We also find that firms facing higher uncertainty let their capital stock depreciate further before they invest, but increase their capital by a similar proportion once they do invest. We extend both the user cost and q theories of investment to incorporate lumpy investment. We confirm that with lumpy investment, a variant of Tobin's q can be a better predictor of investment than marginal q.

Suggested Citation

  • John Bailey Jones & Duc T. Le, 2002. "Optimal Investment with Lumpy Costs," Discussion Papers 02-02, University at Albany, SUNY, Department of Economics.
    • Handle: RePEc:nya:albaec:02-02
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    Cited by:

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    3. Kort, Peter M. & Murto, Pauli & Pawlina, Grzegorz, 2010. "Uncertainty and stepwise investment," European Journal of Operational Research, Elsevier, vol. 202(1), pages 196-203, April.
    4. Fabio Verona, 2014. "Investment Dynamics with Information Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1627-1656, December.
    5. repec:zbw:bofrdp:2013_018 is not listed on IDEAS

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