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Investment Demand When Economic Depreciation is Stochastic
Author(s) -
Fousekis Panos,
Shortle James S.
Publication year - 1995
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1243822
Subject(s) - depreciation (economics) , economics , investment function , investment (military) , stock (firearms) , profit (economics) , microeconomics , capital accumulation , capital (architecture) , econometrics , monetary economics , financial economics , production (economics) , capital formation , financial capital , mechanical engineering , archaeology , politics , political science , law , history , engineering
The neoclassical model of investment by a risk‐neutral firm is generalized to include uncertainty about the rate of depreciation by replacing the deterministic capital accumulation identity with a stochastic variant. Ito's stochastic dynamic optimization is used to derive conditions for optimal investment. A nondegenerate steady‐state distribution of the capital stock is shown to exist and is derived for the empirically important case of a normalized quadratic profit function and static price expectations. It is demonstrated for this case that uncertainty about the rate of depreciation decreases the expected steady‐state capital stock and investment.