This paper considers the timing and intensity of investment and the evolution of the capital stock under incremental and lumpy investment. For lumpy investment, the comparative statics of intensity and timing are striking. An increase in uncertainty, for example, delays the investment project but increases its size when it occurs. Other parameters also exhibit counterintuitive patterns. No counterintuitive results occur for incremental investment. For instance, uncertainty lowers the intensity of investment. This implies that sometimes the capital stock will be larger under lumpy investment, while other times it will be larger under incremental investment.
Bibliographical noteFunding Information:
*We thank two referees for helpful suggestions. Strange thanks 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.
ASJC Scopus subject areas
- Economics and Econometrics