A UNIFIED MODEL OF INVESTMENT UNDER UNCERTAINTY

This paper extends the theory of investment under uncertainty to incor porate fixed costs of investment, a wedge between the purchase price a nd sale price of capital, and potential irreversibility of investment. In this extended framework, investment is a nondecreasing function of q, the shadow price of installed capital. The optimal rate of investm ent is in one of three regimes (positive, zero, or negative gross inve stment), depending on the value of q relative to two critical values. In general however, the shadow price q is not directly observable, so we present two examples relating q to observable variables.