Sequential Investment in Pollution Control Equipment under Uncertainty
نویسنده
چکیده
Overview This paper investigates the investment in pollution control equipment under uncertainty. We assume that a firm's output generates a pollution by-product and the pollution reduces the productivity of capital. The dynamics of pollution is assumed to be governed by stochastic differential equation. Then, the firm has to invest in a pollution control equipment in order to reduce the pollutant and it incurs equipment cost. The firm also pays environmental tax to use input. In this paper, we assume that the firm can invest it as needed. Then, the firm's problem is to choose the investment timing under uncertainty and is formulated a singular stochastic control problem. We solve the firm's problem by using variational inequalities and obtain the optimal investment strategy which is described by the threshold to invest in the pollution control equipment. Furthermore, we conduct a comparative static analysis on some parameters.
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