An irreversible investment problem with a learning-by-doing feature
Abstract
We study a model of irreversible investment for a decision-maker who has the possibility to gradually invest in a project with unknown value. In this setting, we introduce and explore a feature of "learning-by-doing", where the learning rate of the unknown project value is increasing in the decision-maker's level of investment in the project. We show that, under some conditions on the functional dependence of the learning rate on the level of investment (the "signal-to-noise" ratio), the optimal strategy is to invest gradually in the project so that a two-dimensional sufficient statistic reflects below a monotone boundary. Moreover, this boundary is characterised as the solution of a differential problem. Finally, we also formulate and solve a discrete version of the problem, which mirrors and complements the continuous version.
Keywords
Cite
@article{arxiv.2406.16493,
title = {An irreversible investment problem with a learning-by-doing feature},
author = {Erik Ekström and Yerkin Kitapbayev and Alessandro Milazzo and Topias Tolonen-Weckström},
journal= {arXiv preprint arXiv:2406.16493},
year = {2024}
}