Integration of varying capacity utilization into dynamic capital theory

Literature in capital theory takes it for granted that the capital stock is quasi-…xed and always fully utilized and that net investment to the capital stock is the main source of variation in capital input. This study integrates varying capacity utilization into capital investment models with irreversibility under uncertainty. The result shows that the capacity utilization rate varies as uncertainty rises, which indicates that the capital stock is rather ‡exible within the …rm. The …rm is allowed to reduce even ‡exible factors in a recession, which implies that the …rms is less cautious for new investment compared to previous models because the expected binding cost is smaller. We also …nd that the …rm’s active capital decreases as uncertainty increases, while capital accumulation intensi…es at the same time, which indicates the expected capacity utilization rate is a decreasing function of uncertainty.