Investment demand when economic depreciation is stochastic

The neoclassical model of investment by a risk-neutral firm is generalized to include uncertainty about the rate of depreciation by replacing the deterministic capital accumulation identity with a stochastic variant. Ito's stochastic dynamic optimization is used to derive conditions for optimal...

Full description

Saved in:
Bibliographic Details
Published in:American journal of agricultural economics 1995-11, Vol.77 (4), p.990-1000
Main Authors: Fousekis, Panos, Shortle, James S.
Format: Article
Language:English
Subjects:
Agricultural economics
Agricultural production
Agriculture
Capital accumulation
Capital assets
Capital depreciation
capital formation
Capital investments
Capital stock
Capital stocks
D210
D920
Depreciation
dynamic models
Economic models
Economic uncertainty
Economics
Farms
Financial investments
firms
investment
Investment demand
Investment policy
investment under uncertainty
Investments
Ordinary differential equations
Present value
Prices
profit functions
Q120
Random variables
risk
Steady state economies
stochastic dynamic optimization
Stochastic models
Stochastic processes
Uncertainty
Citations: Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The neoclassical model of investment by a risk-neutral firm is generalized to include uncertainty about the rate of depreciation by replacing the deterministic capital accumulation identity with a stochastic variant. Ito's stochastic dynamic optimization is used to derive conditions for optimal investment. A nondegenerate steady-state distribution of the capital stock is shown to exist and is derived for the empirically important case of a normalized quadratic profit function and static price expectations. It is demonstrated for this case that uncertainty about the rate of depreciation decreases the expected steady-state capital stock and investment.
ISSN:0002-9092
1467-8276
DOI:10.2307/1243822