Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/233220 
Year of Publication: 
2006
Series/Report no.: 
Discussion paper No. 4
Publisher: 
Aboa Centre for Economics (ACE), Turku
Abstract: 
We consider optimal incremental capital accumulation in the presence of investment irreversibility and general price uncertainty. We present a set of general conditions under which the optimal capital accumulation path can be explicitly characterized in terms of an ordinary threshold rule stating that investment is optimal whenever the underlying price exceeds a capital-dependent threshold. We also present a set of general conditions under which increased price volatility expands the region where investment is suboptimal and decreases both the expected cumulative present value of the marginal revenue product of capital and the value of the future expansion options.
Subjects: 
Price uncertainty
irreversible investment
incremental capital accumulation
JEL: 
G31
D92
C61
Document Type: 
Working Paper

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