The Effects of Irreversibility and Uncertainty on Capital Accumulation

When investment decisions cannot be reversed and returns to capital are uncertain, the firm faces a higher user cost of capital than if it could reverse its decisions. This higher user cost tends to reduce the firm's capital stock. Opposing this effect is the irreversibility constraint itself: when the constraint binds, the firm would like to sell capital but cannot. This effect tends to increase the firm's capital stock. We show that a firm with irreversible investment may have a higher or a lower expected capital stock, even in the long run, compared to an otherwise identical firm with reversible investment. Furthermore, an increase in uncertainty can either increase or decrease the expected long-run capital stock under irreversibility relative to that under reversibility. However, changes in the expected growth rate of demand, the interest rate, the capital share in output, and the price elasticity of demand all have unambiguous effects.

Q Theory Without Adjustment Costs & Cash Flow Effects Without Financing Constraints

Tobin's Q exceeds one, even without any adjustment costs, for a firm that earns rents as a result of monopoly power or of decreasing returns to scale in production. Even when there are no adjustment costs and marginal Q is always equal to one, Tobin's Q is informative about the firm's growth prospects. We show that investment is positively related to Tobin's Q (which is observable average Q). This effect can be quantitatively small, which has been taken as evidence of very high adjustment costs in the empirical literature, but here is consistent with no adjustment costs at all. In addition, cash flow has a positive effect on investment, and this effect is larger for smaller, faster growing and more volatile firms, even though capital markets are perfect. These results provide a new theoretical foundation for Q theory and also cast doubt on evidence of financing constraints based on cash flow effects on investmentQ Theory, Cash Flow, Investment

A Unified Model of Investment Under Uncertainty

This paper extends the theory of investment under uncertainty to incorporate fixed costs of investment, a wedge between the purchase price and sale price of capital, and potential irreversibility of investment. In this extended framework, investment is a non-decreasing function of q, the shadow price of installed capital. There are potentially three investment regimes, which depend on the value of q relative to two critical values. For values of q above the upper critical value, investment is positive and is an increasing function of q, as is standard in the theory branch of the adjustment cost literature. For intermediate values of q, between two critical values, investment is zero. Although this regime features prominently in the irreversibility literature, it is largely ignored in the adjustment cost literature. Finally, if q is below the lower critical value, gross investment is negative, a possibility that is ruled out by assumption in the irreversibility of literature. In general, however, the shadow price q is not directly observable, so we present two examples relating q to observable varieties.

Two-Pulse Propagation in a Partially Phase-Coherent Medium

We analyze the effects of partial coherence of ground state preparation on two-pulse propagation in a three-level $\Lambda$ medium, in contrast to previous treastments that have considered the cases of media whose ground states are characterized by probabilities (level populations) or by probability amplitudes (coherent pure states). We present analytic solutions of the Maxwell-Bloch equations, and we extend our analysis with numerical solutions to the same equations. We interpret these solutions in the bright/dark dressed state basis, and show that they describe a population transfer between the bright and dark state. For mixed-state $\Lambda$ media with partial ground state phase coherence the dark state can never be fully populated. This has implications for phase-coherent effects such as pulse matching, coherent population trapping, and electromagnetically induced transparency (EIT). We show that for partially phase-coherent three-level media, self induced transparency (SIT) dominates EIT and our results suggest a corresponding three-level area theorem.Comment: 29 pages, 12 figures. Submitted to Phys. Rev.

Cascade atom in high-Q cavity: The spectrum for non-Markovian decay

The spontaneous emission spectrum for a three level cascade configuration atom in a single mode high-Q cavity coupled to a zero temperature reservoir of continuum external modes is determined from the atom-cavity mode master equation using the quantum regression theorem. Initially the atom is in its upper state and the cavity mode empty of photons. Following Glauber, the spectrum is defined via the response of a detector atom. Spectra are calculated for the detector located inside the cavity (case A), outside the cavity end mirror (Case B-end emission), or placed for emission out the side of the cavity (Case C). The spectra for case A and case B are found to be essentially the same. In all the cases the predicted lineshapes are free of instrumental effects and only due to cavity decay. Spectra are presented for intermediate and strong coupling regime situations (where both atomic transitions are resonant with the cavity frequency), for cases of non-zero cavity detuning, and for cases where the two atomic transition frequencies differ. The spectral features for Cases B(A) and C are qualitatively similar, with six spectral peaks for resonance cases and eight for detuned cases. These general features of the spectra can be understood via the dressed atom model. However, Case B and C spectra differ in detail, with the latter exhibiting a deep spectral hole at the cavity frequency due to quantum interference effects.Comment: 29 pages, 14 figures; v2: very minor correction to two equations, thicker lines in some figure

An Exact Solution for the Investment and Market Value of Firm Facing Uncertainty, Adjustment Costs, and Irreversibility

This paper derives closed-form solutions for the investment and value of a competitive firm with a constant-returns-to-scale production function and convex costs of adjustment. Solutions are derived for the case of irreversible investment as well as for reversible investment. Optimal investment is a non-decreasing function of q, the shadow value of capital. Relative to the case of reversible investment, the introduction of irreversibility does not affect q, but it reduces the fundamental value of the firm

The Mix and Scale of Factors with Irreversibility and Fixed Costs of Investment

When factors of production can be adjusted costlessly, the mix of factors can be considered separately from their scale. We examine factor choice and utilization when investment is irreversible and subject to a fixed cost, so that the capital stock is a quasi-fixed factor that is adjusted infrequently and by discrete amounts. We derive and analyze analytic approximations for optimal investment behavior, and show how the quasi-fixity of capital eliminates the dichotomy between factor mix and scale. We show that the quasi-fixity of capital can give rise to labor hoarding, even when labor is a purely flexible factor