INVESTMENT, UNCERTAINTY, AND PRICE STABILIZATION SCHEMES

This paper uses the methods of regulated Brownian motion to analyze the effects of price stabilization schemes on investment when demand is uncertain. Price controls smooth investment, even when the controls are not binding. as price approaches a price ceiling, for example, a firm expects with high probability that price will fall, and so reduces its rate of capital accumulation. A corollary is that, contrary to models of existing models of investment under uncertainty, investment may actually decrease with the instantaneous variance of price if there is a price ceiling.