A model for investment decisions with switching costs. (Q1872483)

This paper deals with following investment model. An investment project can produce a single commodity whose price is modelled by a geometric Brownian motion. The project can operate in two modes: active and passive. In the active mode, the project yields payoff at a rate which depends on the commodity price as well as on the choice of a production rate which is a decision variable. In the passive mode, the project incurs losses at a constant rate. The transition from one mode to the other can be realized immediately at certain fixed costs, and constitutes an additional decision strategy. There is no limit to the number of times the project's mode can be changed. The pricing of an investment conforming with this model gives rise to a stochastic impulse control problem that authors explicitly solve. Obtained solution takes qualitatively different forms, depending on the problem's data.