OPTIMAL INVESTMENT WITH COSTLY REVERSIBILITY

Investment is characterized by costly reversibility when a firm can pu rchase capital at a given price and sell capital at a lower price. We solve for the optimal investment of a firm that faces costly reversibi lity under uncertainty and we extend the Jorgensonian concept of the u ser cost of capital to this case. We define and calculate c(V) and c(L ) as the user costs of capital associated with the purchase and sale o f capital, respectively. Optimality requires the firm to purchase and sell capital as needed to keep the marginal revenue product of capital in the closed interval [c(L), c(U)]. This prescription encompasses th e case of irreversible investment as well as the standard neoclassical case of costlessly reversible investment.