Abstract
ABSTRACT When investment opportunities arrive one at a time and are reviewed sequentially, a corporation's optimal policy differs from a standard net present value rule if the corporation exercises control over an industry state variable and control is costly. The first condition presupposes a degree of market power for the firm; the second occurs if corporate investment decisions are imperfectly reversible. To address the problem of optimal investment in this context, a firm's investment decisions are modeled as a Markov reward process. The causes of economic irreversibility are discussed and general propositions concerning the optimal investment policy are derived. These propositions are then applied to the optimization of an exploration program by an oligopolistic firm (a price leader). Under particular demand and distributional assumptions, solutions for the optimal decision rule and the value of the exploration program are obtained and their properties examined.
Keywords
OligopolyEconomicsMicroeconomicsInvestment (military)Investment policyCorporationContext (archaeology)Value (mathematics)Markov decision processCapital (architecture)Investment decisionsStochastic controlInvestment strategyPresent valueOptimal controlMarkov processCournot competitionFinanceProduction (economics)Mathematical optimizationComputer scienceMathematics
Related Publications
Strategic Factor Markets: Expectations, Luck, and Business Strategy
Much of the current thinking about competitive strategy focuses on ways that firms can create imperfectly competitive product markets in order to obtain greater than normal econ...
Strategic assets and organizational rent
Abstract We build on an emerging strategy literature that views the firm as a bundle of resources and capabilities, and examine conditions that contribute to the realization of ...
Enhanced Interpretation of Diagnostic Images
In radiology, as in various other fields, observers study images to detect and diagnose underlying conditions. They make assessments of several image features and merge them int...
Stochastic Petri net representation of discrete event simulations
In the context of discrete event simulation, the marking of a stochastic Petri net (SPN) corresponds to the state of the underlying stochastic process of the simulation and the ...
What Do We Know about Capital Structure? Some Evidence from International Data
ABSTRACT We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate ...
Publication Info
- Year
- 1982
- Type
- article
- Volume
- 37
- Issue
- 3
- Pages
- 763-782
- Citations
- 105
- Access
- Closed
External Links
Social Impact
Altmetric
PlumX Metrics
Social media, news, blog, policy document mentions
Citation Metrics
105
OpenAlex
Cite This
Carliss Y. Baldwin
(1982).
Optimal Sequential Investment When Capital is Not Readily Reversible.
The Journal of Finance
, 37
(3)
, 763-782.
https://doi.org/10.1111/j.1540-6261.1982.tb02222.x
Identifiers
- DOI
- 10.1111/j.1540-6261.1982.tb02222.x