DYNAMIC MONOTONICITY AND COMPARATIVE STATICS FOR REAL OPTIONS

We analyze thr relationship between complementarities and monotonicity in dynamic programs. While complementarities (supermodularity and non decreasing differences) are sufficient for monotonic statics ill stoch astic dynamic programs: they an only ''robustly'' necessary in a limit ed may under heavy discounting, Monotonicity oi the: decision rule due s not in general imply monotonicity of the optimal path. In Fact, opti mal paths in such models may exhibit extremely complex behavior. Fur c onvex adjustment costs many real option models have monotone decision rules, while ibr fixed costs they typically do not. We also strengthen a weil known characterization of complementaries due to Milgrom and S hannon [19]. Journal of Economic Literature Classification Numbers: C6 1, D92, E22. (C) 1997 Academic Press.