Abstract

This paper proves the optimality of an (S, s) policy in a discrete-time model of investment with fixed adjustment costs and complete irreversibility. Investment is shown to depend simultaneously on marginal and average Q, which are sufficient statistics of, respectively, marginal and total gains of adjustment. Cash-flows are not a correct proxy for the marginal value of capital, the latter being a non-monotonic function of profitability. Neither functional forms nor calibration are imposed and there is no need for numerical procedures. The result holds for a wide class of shocks and technologies. Proofs use the concept of K-convexity introduced by [Scarf, 1960].

Citations