Econometrica: Sep 1971, Volume 39, Issue 5

Investment Under Uncertainty

https://doi.org/0012-9682(197109)39:5<659:IUU>2.0.CO;2-0
p. 659-681

Edward C. Prescott, Robert E. Lucas, Jr

This paper determines the time series behavior of investment, output, and prices in a competitive industry with a stochastic demand. It is shown, first, that the equilibrium development for the industry solves a particular dynamic programming problem (maximization of "consumer surplus"). This problem is then studied to determine the characteristics of the equilibrium paths.
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