Wicksellian theory of forest rotation under interest rate variability

Luis H. R. Alvarez and Erkki Koskela (2005). "Wicksellian theory of forest rotation under interest rate variability." Journal of Economic Dynamics and Control 29, 3 (March): 529-545.

Abstract
We apply the Wicksellian single rotation framework to cover the unexplored case of variable and stochastic interest rate. We provide a mathematical characterization of the two-dimensional optimal stopping problem and show in the presence of amenity valuation that increased interest-rate volatility lengthens the optimal rotation period and increases the value of the optimal policy. By modelling the interest rate as a mean reverting process and forest value as a geometric Brownian motion and abstracting from amenity valuation, we present an explicit solution for the problem. Numerical illustrations indicate that interest-rate volatility has a significant and non-linear impact on optimal rotation.

Author Keywords: Wicksellian rotation; Stochastic interest rates; Optimal stopping; Free boundary problems

JEL Classification: Q23; G31; C61

Factor price uncertainty, technology choice and investment delay

Joseph P. Kaboski (2005). "Factor price uncertainty, technology choice and investment delay." Journal of Economic Dynamics and Control 29, 3 (March): 509-527.

Abstract
This paper develops a theory of putty-clay investment under factor price uncertainty using a Brownian motion framework. Ex ante the firm faces a choice of technologies that differ by their relative factor intensities, but ex post technologies are Leontief. The presence of competing technologies and factor price uncertainty can cause delay of profitable investments for a monopolist firm facing a one-time investment decision. Furthermore, uncertainty can cause an existing firm to wait for more extreme operating cost differentials before switching technologies. These delays in investment are present even without considering the effect of uncertainty on the firm's choice of scale.

Author Keywords: Technology choice; Firm investment; Brownian motion

JEL Classification: L1, D8