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Dynamic EconomicsOptimization by the Lagrange Method$
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Gregory C. Chow

Print publication date: 1997

Print ISBN-13: 9780195101928

Published to Oxford Scholarship Online: October 2011

DOI: 10.1093/acprof:oso/9780195101928.001.0001

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Models of Investment

Models of Investment

(p.172) Chapter Eight Models of Investment
Dynamic Economics


Oxford University Press

In models that represent the investment decision made by a firm, the decision is to be perceived as an option to invest. As such, the option cannot be reversed once it has been employed. By the stochastic differential equation illustrated in this chapter, which also includes a variable to denote the Wiener process, the present value of the investment project at a certain time is said to change through time. In such problems, it is important to determine the optimum time to invest or to push through with the desired option. This chapter looks into the theory of investment, specifically through how Pindyck has solved the problem through dynamic programming and Lagrangean multipliers. It also looks at models which incorporate adjustment cost.

Keywords:   investment decision, differential equation, dynamic programming, adjustment cost, optimum time

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