A Markup Interpretation of Optimal Investment Rules

Abstract

We re‐examine the basic investment problem of deciding when to incur a sunk cost to obtain a stochastically fluctuating benefit. The optimal investment rule satisfies a trade‐off between a larger versus a later net benefit; we show that this trade‐off is closely analogous to the standard trade‐off for the pricing decision of a firm that faces a downward sloping demand curve. We reinterpret the optimal investment rule as a markup formula involving an elasticity that has exactly the same form as the formula for a firm's optimal markup of price over marginal cost. This is illustrated with several examples.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 96 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.