| In this dissertation we find the optimal path of capital accumulation for a firm in a model with costly reversibility of investment, uncertainty of output demand, and both fixed and variable adjustment cost. We aim at an explanation for the gap between theoretical predictions of neoclassical models and empirical evidence on investment. The model is described in chapter 2.; The model with irreversibility is solved analytically in chapter 3. As a result, we define an augmented user cost of capital, which includes the standard one by Jorgenson, the value of waiting, and a cost related to lumpiness. With respect to q-theory, we find that the marginal value of capital at the moment of investment is generally lower than the marginal cost of investment. The two measures, however, are equal just after investment. Furthermore, the marginal value of capital is negatively correlated with demand for high values of demand, and therefore is less adequate than Tobin's q as a determinant of investment.; Chapter 4 is an attempt to bridge two investment models. One allows purchase and sale of capital at the same price, and the other rules out sale of capital. We let used capital be sold at a resale price between zero and the price of new capital. We then solve the model numerically. An implication of this chapter is that the assumption of irreversibility is reasonable for analysis of investment by a typical U.S. manufacturing firm.; Chapter 5 examines the impact of taxation on investment of firms in the model of irreversible lumpy investment. The effects of capital gains tax, corporate income tax and investment tax credits on the user cost, value of the firm, and investment are analyzed.; Further, we derive equations expressing investment in terms of tax parameters. In the presence of irreversibility, the effect of a tax reform can be split into an effect on investment and an effect on the firm's value. In a recession, the latter effect may be a major part of the reform's merit. Both a cut in corporate income tax and an investment tax credit can affect investment. |
