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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2006/11:
Irreversible Investments Revisited

Leif Kristoffer Sandal () and Stein Ivar Steinshamn ()

Abstract: A non-linear dynamic model in two state variables, two controls and three cost terms is presented for the purpose of finding the optimal combination of exploitation and capital investment in optimal renewable resource management. Non-malleability of capital is, in other words, incorporated in the model through an asymmetric convex cost-function of investment, and investments can be both positive and negative. Exploitation is controlled through the utilisation rate of available capital. A novel feature in this model is that there are fixed costs associated with the available capital whether it is utilised or not. In contrast to most of the previous literature both state variables enter the objective function.

Keywords: Irreversible investments; non-malleable capital; renewable resources; (follow links to similar papers)

JEL-Codes: C61; Q20; (follow links to similar papers)

20 pages, October 11, 2006

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