Working Paper: NBER ID: w1484
Authors: Andrew B. Abel
Abstract: This paper presents closed-form solutions for the investment and valuation of a competitive firm with a Cobb-Douglas production function and a constant elasticity adjustment cost function in the presence of stochastic prices for output and inputs. The value of the firm is a linear function of the capital stock. The optimal rate of investmentis an increasing function of the slope of the value function with respect to the capital stock (marginal q). A mean preserving spread of the distribution of future price increases investment. An increase in the scale of the random component of a price can increase, decrease or not affect the rate of investment depending on the sign of the covariance of this price with a weighted average of all prices.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in uncertainty about prices (D89) | increase in the rate of investment (E22) |
| increase in the scale of the random component of a single price (E30) | increase/decrease/unchanged rate of investment (E22) |
| covariance of prices (E30) | influence on investment decisions (G11) |