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A Dynamic Model of Investment and Capacity Utilization

Andrew B. Abel
The Quarterly Journal of Economics
Vol. 96, No. 3 (Aug., 1981), pp. 379-404
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/1882679
Page Count: 25
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A Dynamic Model of Investment and Capacity Utilization
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Abstract

This paper develops a dynamic optimizing model of a firm with quasi-fixed factors subject to adjustment costs. The utilization rates of the quasi-fixed factors are chosen optimally by the firm, and the rates of investment in the quasi-fixed factors are based on the shadow prices of these factors, in the spirit of Tobin's q theory of investment. Capital investment is shown to be negatively related to capital utilization along the path to the steady state; however, in response to unanticipated demand shocks, capital utilization and investment are positively related.

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