A Simplified Exposition of Smooth Pasting
The decision on when to make an irreversible investment is considered as a trade-off between the instantaneous size of the net benefit and that time at which it is obtained. The benefit can be larger by waiting longer, but then it will also have to be more discounted. Smooth pasting arises as a first-order condition for maximum expected profit. The relationship to the standard approach is illustrated by a geometric Brownian price process.
Publisert i Economics Letters, 1998
Les artikkelen her