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On irreversible investment

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Abstract

This paper presents a new and general approach to the theory of irreversible investment. We show that the optimal policy is a base capacity policy and derive general monotone comparative statics results. When the operating profit function is supermodular, the base capacity increases monotonically with the exogenous shock; and firm size is decreasing in the user cost of capital. Last but not least, the paper provides a general existence theorem for optimal policies.

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Authors and Affiliations

  1. Institute of Mathematical Economics, Bielefeld University, Postfach, 33602, Bielefeld, Germany

    Frank Riedel

  2. GRA RMT Model Validation Rates, Commerzbank AG, Theodor-Heuss-Allee 44-46, 60301, Frankfurt, Germany

    Xia Su

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  1. Frank Riedel
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  2. Xia Su
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Correspondence to Frank Riedel.

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Riedel, F., Su, X. On irreversible investment. Finance Stoch 15, 607–633 (2011). https://doi.org/10.1007/s00780-010-0131-y

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