Irreversible Investment and Industry Equilibrium

FINANCE AND STOCHASTICS, Vol. I, No. 1, 1997

Posted: 16 Oct 1996

See all articles by Fridrik Mar Baldursson

Fridrik Mar Baldursson

Reykjavik University

Ioannis Karatzas

Columbia University - Department of Statistics

Abstract

We establish the equivalence of competitive industry equilibrium with a central planner's decision problem under uncertainty, when investment is irreversible. The existence of industry equilibrium is derived, and it is shown that myopic behavior on the part of small agents is harmless, in the sense that it leads to the same decisions as full rational expectations do. Our model is set in continuous time and allows for very general forms of randomness. The methods are based on the probabilistic approach to singular stochastic control theory and its connections with optimal stopping problems.

JEL Classification: E22, D92, G31

Suggested Citation

Baldursson, Fridrik Mar and Karatzas, Ioannis, Irreversible Investment and Industry Equilibrium. FINANCE AND STOCHASTICS, Vol. I, No. 1, 1997, Available at SSRN: https://ssrn.com/abstract=3405

Fridrik Mar Baldursson (Contact Author)

Reykjavik University ( email )

Menntavegur 1
Reykjavik, 101
Iceland
354-8256396 (Phone)
354-5996201 (Fax)

HOME PAGE: http://www.ru.is/starfsfolk/fmb

Ioannis Karatzas

Columbia University - Department of Statistics ( email )

Mail Code 4403
2990 Broadway, Room 618
New York, NY 10027
United States
212-854-3177 (Phone)
212-663-2454 (Fax)

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