The Optimal Investment Process in German Industry

Abstract

This paper is dedicated to Professor S. K. Srinivasan on the occasion of his 70th birthday. Professor Srinivasan has made signiflcant contributions to the theory of optimal investment decisions, including the theory of maintenance and replacement. He has inspired many outstanding young mathematicians and mathematical economists to work in this interesting and complex fleld. His work and the work of his group at the Indian Institute of Technology have provided new insights in optimal replacement strategies and optimal stand-by policies. These results have stimulated research in the field of industrial investment processes in many parts of the world. The following paper is the outcome of research in the optimal investment behavior of firms that started with an analysis of optimal investment behavior under uncertainty, with optimal capital budgeting under uncertain cash constraints, and was greatly influenced by ideas of investing in stand-by facilities as an insurance against risk. In this paper we try to model the investment process over time with the cost of adaptation being influenced also by the institutional framework that the economy provides for the investing firm.