Stochastic growth with irreversible investment (Q909567)

The object of this paper is to provide a framework for studying an intertemporal resource allocation problem of the neoclassical type, when investment is in a certain sense irreversible and future production is uncertain due to the presence of random shocks in the past. Thus at each point of time decisions on resource allocation are made before the effect of foregoing random shocks materialized. The author proves the existence of a stationary optimal policy that depends on gross output and the nondepreciable stock of capital and gives a complete characterization of such a policy by showing that optimal consumption and input stocks are monotonically nondecreasing functions of the output and the depreciated stock of capital. Stochastic Kuhn-Tucker conditions are used to prove that the optimal input policy is strictly increasing in the input stock and that there exists a unique limit distribution or equivalently a steady state to which every optimal program converges regardless of the initial stock. The paper concludes comparing the obtained results with those known for the case of reversible policies.