Abstract
This paper specifies a model of a two-stage sequential investment where the stages take time to complete. It presents algebraic solutions for an individual firm's optimal sequential investment with costless suspension, without suspension, in the intermediate case of costly suspension, and for aggregate investment. With suspension, the first-stage trigger is below the second-stage trigger for sufficiently long lags and high levels of output price uncertainty. Thus, the firm may carry out 'exploratory' investment. We also evaluate the comparative statics of investment, and show how the patterns of project costs and lags affect the incentive to invest.
| Original language | English |
|---|---|
| Pages (from-to) | 437-463 |
| Number of pages | 27 |
| Journal | Journal of Economic Dynamics and Control |
| Volume | 22 |
| Issue number | 3 |
| DOIs | |
| State | Published - Mar 1998 |
Bibliographical note
Funding Information:We thank two very helpful referees and Iain Cockburn for comments. This research was initiated while Strange was a visitor at the Department of Economics at the University of Haifa. Strange thanks the University of Haifa Economics Department, the Canadian Real Estate Research Bureau, the Real Estate Foundation of British Columbia, and the Social Sciences and Humanities Research Council of Canada for research support.
Keywords
- Lags
- Sequential investment
- Suspension
ASJC Scopus subject areas
- Economics and Econometrics
- Control and Optimization
- Applied Mathematics