TY - JOUR
AU - Abel,Andrew B.
TI - A Stochastic Model of Investment, Marginal q and the Market Value of theFirm
JF - National Bureau of Economic Research Working Paper Series
VL - No. 1484
PY - 1984
Y2 - October 1984
DO - 10.3386/w1484
UR - http://www.nber.org/papers/w1484
L1 - http://www.nber.org/papers/w1484.pdf
N1 - Author contact info:
Andrew B. Abel
The Wharton School
University of Pennsylvania
2315 Steinberg Hall - Dietrich Hall
Philadelphia, PA 19104-6367
Tel: 215/898-4801
Fax: 215/573-7244
E-Mail: abel@wharton.upenn.edu
AB - 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.
ER -