A neoclassical model of a firm subject to a putty-putty technology

Abstract

In this chapter we shall investigate the theoretical properties of the putty-putty model described briefly in section 2.4.1 of the previous chapter. The presentation of the model is divided according to the main characteristics of the firm, i.e. market environment, information structure, production structure and objective(s) (sect. 3.1–3.3). In section 3.4 an existence theorem for an optimal policy is presented subject to suitable conditions on the expectations of the firm. In section 3.5 the properties of an optimal policy are investigated in a neighbourhood of the steady state. The asymptotic characteristics of this policy are used in section 3.6 to construct an approximation that can be used in empirical work. Section 3.7 compares this approximation with other approaches in the literature.