MULTIFACTOR DYNAMIC INVESTMENT UNDER UNCERTAINTY

We characterize a firm's optimal factor adjustment when any number of factors Face ''kinked'' linear adjustment costs so that all factor acc umulation is costly to reverse. We first consider a general non-statio nary case with a concave operating profit function, unrestricted form of uncertainty and a horizon of arbitrary length. We show that the opt imal investment strategy follows a control limit policy at each point in time. The state space of the firm's problem is partitioned into var ious domains, including a continuation region where no adjustment shou ld optimally be made to factor levels. We then consider two specific m odel classes and exploit their special structure to derive expressions for their continuation regions. (C) 1997 Academic Press.