Optimal investment policy with fixed adjustment costs and complete irreversibility

- We model investment decisions with a fixed adjustment cost not proportional to existing capital.
- The optimal policy is of the generalized (S,s) form.
- In agreement with the empirical evidence, as the firm size increases, investment becomes less lumpy.

We develop and characterize analytically an investment model in discrete time with a fixed adjustment cost not proportional to existing capital and complete irreversibility that reproduces the lumpiness of investment at the micro-level. In agreement with the empirical evidence, as a firm size increases, investment becomes less lumpy. The optimal policy is of the generalized (S,s) form.