PRODUCTION AND INVESTMENT DECISIONS UNDER SUNK COST AND TEMPORAL 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 how 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.