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Production and investment decisions under sunk cost and temporal uncertainty
- Chavas, J.P.
- American journal of agricultural economics 1994 v.76 no.1 pp. 114-127
- agriculture, production economics, production functions, investment, decision making, costs and returns, dynamic models, risk, uncertainty
- Building on Glenn Johnson's asset fixity theory, this article introduces sunk cost and temporal uncertainty in Jorgenson's neoclassical theory of investment. Under the assumption of risk neutrality, we show sunk cost and temporal risk affect the implicit rental value of capital and investment and entry-exit decisions. Results suggest there are important interactions between sunk cost and the effects of temporal uncertainty on production behavior.