Multi-factor dynamic investment under uncertainty

We characterize a firm's optimal factor adjustment when any number of factors Face ''kinked'' linear adjustment costs so that all factor accumulation is costly to reverse. We first consider a general non-stationary case with a concave operating profit function, unrestricted form of uncertainty and a horizon of arbitrary length. We show that the optimal investment strategy follows a control limit policy at each point in time. The state space of the firm's problem is partitioned into various domains, including a continuation region where no adjustment should optimally be made to factor levels. We then consider two specific model classes and exploit their special structure to derive expressions for their continuation regions. (C) 1997 Academic Press.