(This abstract was borrowed from another version of this item.)"> (This abstract was borrowed from another version of this item.)">
[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/hal/wpaper/hal-00612626.html
   My bibliography  Save this paper

Perishable Investment and Hysteresis in Capital Formation

Author

Listed:
  • Bernard Dumas

    (HEC Paris - Recherche - Hors Laboratoire - HEC Paris - Ecole des Hautes Etudes Commerciales)

Abstract
Entry into a market seems to necessitate some investment into "marketing capital" (or distribution capital: advertising, dealerships, etc…). This form of investment has the property that, if it is unused for some time, it quickly becomes worthless. When entry into a market requires marketing investment, firms which are currently out of this market tend to delay entry until price vs. cost conditions have become extremely favorable. Conversely, firms which are in the market tend to delay exit until they can no longer bear large operating losses. This is because they know that, if they do exit, and if price vs. cost conditions later become favorable again, they will have to incur afresh the investment in marketing capital. The purpose of the present paper is to produce a general-equilibrium model of capital formation in an economy subject to random shocks, when marketing capital (with the above properties) is used in distribution, in addition to the "normal" capital used in production. We exhibit an analytical solution to the dynamic program representing the welfare optimum problem, along with the shadow prices corresponding to this program. These are also the prices which would support the general equilibrium of a decentralized market economy. Our results pertain to the effect of entry costs, risk, risk aversion and productivity on the balance between marketing and productive capital, to the nature of growth paths in this economy and to the level of prices (such as the price of shares in the stock market, or the price of final goods) as well as the extent to which productivity shocks are passed through into these prices.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Bernard Dumas, 1989. "Perishable Investment and Hysteresis in Capital Formation," Working Papers hal-00612626, HAL.
    • Handle: RePEc:hal:wpaper:hal-00612626
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(2), pages 529-538.
    3. Marc Nerlove, 1974. "Household and Economy: Toward a New Theory of Population and Economic Growth," NBER Chapters, in: Marriage, Family, Human Capital, and Fertility, pages 200-221, National Bureau of Economic Research, Inc.
    4. Richard Baldwin & Richard K. Lyons, 1988. "The Mutual Amplification Effect of Exchange Rate Volatility and Unresponsive Trade Prices," NBER Working Papers 2677, National Bureau of Economic Research, Inc.
    5. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-654, September.
    6. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    7. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 381-402.
    8. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    9. George M. Constantinides, 2005. "Capital Market Equilibrium with Transaction Costs," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 7, pages 207-227, World Scientific Publishing Co. Pte. Ltd..
    10. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 669-682.
    11. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
    12. Romer, P.M., 1988. "Capital Accumulation In The Theory Of Long Run Growth," RCER Working Papers 123, University of Rochester - Center for Economic Research (RCER).
    13. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    14. Bernard Dumas, "undated". "Pricing Physical Assets Internationally," Rodney L. White Center for Financial Research Working Papers 12-88, Wharton School Rodney L. White Center for Financial Research.
    15. Romer, Paul M, 1987. "Growth Based on Increasing Returns Due to Specialization," American Economic Review, American Economic Association, vol. 77(2), pages 56-62, May.
    16. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
    17. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    18. Kalyan K. Sanyal & Ronald W. Jones, 2018. "The Theory of Trade in Middle Products," World Scientific Book Chapters, in: International Trade Theory and Competitive Models Features, Values, and Criticisms, chapter 13, pages 203-231, World Scientific Publishing Co. Pte. Ltd..
    19. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    20. Marc Nerlove, 1974. "Toward a New Theory of Population and Economic Growth," NBER Chapters, in: Economics of the Family: Marriage, Children, and Human Capital, pages 527-548, National Bureau of Economic Research, Inc.
    21. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    22. F. A. Lutz, 1961. "The Theory of Capital," International Economic Association Series, Palgrave Macmillan, number 978-1-349-08452-4 edited by D. C. Hague, December.
    23. Baldwin, Richard, 1990. "Hysteresis in Trade," Empirical Economics, Springer, vol. 15(2), pages 127-142.
    24. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
    25. Nicholas Kaldor, 1961. "Capital Accumulation and Economic Growth," International Economic Association Series, in: D. C. Hague (ed.), The Theory of Capital, chapter 0, pages 177-222, Palgrave Macmillan.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Franz, Wolfgang, 1990. "Hysteresis in Economic Relationships: An Overview," Empirical Economics, Springer, vol. 15(2), pages 109-125.
    2. Bernard Dumas, 1993. "Partial- Vs. General-Equilibrium Models of the International Capital Market," NBER Working Papers 4446, National Bureau of Economic Research, Inc.
    3. Winston Wei Dou & Yan Ji & David Reibstein & Wei Wu, 2021. "Inalienable Customer Capital, Corporate Liquidity, and Stock Returns," Journal of Finance, American Finance Association, vol. 76(1), pages 211-265, February.
    4. Winston Wei Dou & Yan Ji, 2021. "External Financing and Customer Capital: A Financial Theory of Markups," Management Science, INFORMS, vol. 67(9), pages 5569-5585, September.
    5. Svensson, Lars E. O., 1991. "The term structure of interest rate differentials in a target zone : Theory and Swedish data," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 87-116, August.
    6. Svensson, Lars E. O., 1991. "Target zones and interest rate variability," Journal of International Economics, Elsevier, vol. 31(1-2), pages 27-54, August.
    7. Muro, Kazunobu, 2007. "Individual preferences and the effect of uncertainty on irreversible investment," Research in Economics, Elsevier, vol. 61(4), pages 191-207, December.
    8. Koray Yıldırım & Neşe Algan & Harun Bal, 2024. "Investment Hysteresis: An Empirical Essay Turkish Case," Evaluation Review, , vol. 48(1), pages 143-176, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    2. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    3. Miao, Jianjun & Wang, Neng, 2007. "Investment, consumption, and hedging under incomplete markets," Journal of Financial Economics, Elsevier, vol. 86(3), pages 608-642, December.
    4. Tsekrekos, Andrianos E., 2010. "The effect of mean reversion on entry and exit decisions under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 725-742, April.
    5. Insley, M.C. & Wirjanto, T.S., 2010. "Contrasting two approaches in real options valuation: Contingent claims versus dynamic programming," Journal of Forest Economics, Elsevier, vol. 16(2), pages 157-176, April.
    6. José Balibrea-Iniesta, 2020. "Economic Analysis of Renewable Energy Regulation in France: A Case Study for Photovoltaic Plants Based on Real Options," Energies, MDPI, vol. 13(11), pages 1-19, June.
    7. Hui Chen & Jianjun Miao & Neng Wang, 2010. "Entrepreneurial Finance and Nondiversifiable Risk," The Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4348-4388, December.
    8. Martins, José & Marques, Rui Cunha & Cruz, Carlos Oliveira, 2014. "Maximizing the value for money of PPP arrangements through flexibility: An application to airports," Journal of Air Transport Management, Elsevier, vol. 39(C), pages 72-80.
    9. Spiros H. Martzoukos & Nayia Pospori & Lenos Trigeorgis, 2024. "Corporate investment decisions with switch flexibility, constraints, and path-dependency," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1223-1250, April.
    10. repec:dau:papers:123456789/5374 is not listed on IDEAS
    11. Caren Sureth, 2002. "Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach," German Economic Review, Verein für Socialpolitik, vol. 3(2), pages 185-221, May.
    12. repec:dau:papers:123456789/1046 is not listed on IDEAS
    13. Wang, Tan, 2001. "Equilibrium with new investment opportunities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1751-1773, November.
    14. Bernard Dumas, "undated". "Pricing Physical Assets Internationally," Rodney L. White Center for Financial Research Working Papers 12-88, Wharton School Rodney L. White Center for Financial Research.
    15. Lambrecht, Bart M., 2017. "Real options in finance," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 166-171.
    16. Luis H. R. Alvarez & Erkki Koskela, 2002. "Irreversible Investment under Interest Rate Variability: New Results," CESifo Working Paper Series 640, CESifo.
    17. Bengtsson, Jens, 2001. "Manufacturing flexibility and real options: A review," International Journal of Production Economics, Elsevier, vol. 74(1-3), pages 213-224, December.
    18. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    19. Bastian-Pinto, Carlos L. & Araujo, Felipe V. de S. & Brandão, Luiz E. & Gomes, Leonardo L., 2021. "Hedging renewable energy investments with Bitcoin mining," Renewable and Sustainable Energy Reviews, Elsevier, vol. 138(C).
    20. Belke, Ansgar & Göcke, Matthias, 2019. "Interest rate hysteresis in macroeconomic investment under uncertainty," Ruhr Economic Papers 801, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    21. Linnenluecke, Martina K. & Smith, Tom & McKnight, Brent, 2016. "Environmental finance: A research agenda for interdisciplinary finance research," Economic Modelling, Elsevier, vol. 59(C), pages 124-130.
    22. Bolton, Patrick & Wang, Neng & Yang, Jinqiang, 2019. "Investment under uncertainty with financial constraints," Journal of Economic Theory, Elsevier, vol. 184(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00612626. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.