Scandinavian Working Papers in Economics

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

No 2006/11: Irreversible Investments Revisited

Leif Kristoffer Sandal () and Stein Ivar Steinshamn ()
Additional contact information
Leif Kristoffer Sandal: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Stein Ivar Steinshamn: Institute for Research in Economics and Business Administration (SNF ), Postal: SNF, Breiviksveien 40, N-5045 Bergen, Norway

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

JEL-codes: C61; Q20

20 pages, October 11, 2006

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