In economic situations where action entails a fixed cost, inaction is the norm. Action is taken infrequently, and adjustments are large when they occur. Interest in economic models that exhibit "lumpy" behavior of this kind has exploded in recent years, spurred by growing evidence that it is typical in many important economic decisions, including price setting, investment, hiring, durable goods purchases, and portfolio management. In "The Economics of Inaction", leading economist Nancy Stokey shows how the tools of stochastic control can be applied to dynamic problems of decision making under uncertainty when fixed costs are present.Stokey provides a self-contained, rigorous, and clear treatment of two types of models, impulse and instantaneous control. She presents the relevant results about Brownian motion and other diffusion processes, develops methods for analyzing each type of problem, and discusses applications to price setting, investment, and durable goods purchases. This authoritative book will be essential reading for graduate students and researchers in macroeconomics.
Preface
Ch. 1 Introduction 1
Pt. I Mathematical Preliminaries 15
Ch. 2 Stochastic Processes, Brownian Motions, and Diffusions 17
Ch. 3 Stochastic Integrals and Ito's Lemma 30
Ch. 4 Martingales 53
Ch. 5 Useful Formulas for Brownian Motions 75
Pt. II Impulse Control Models 107
Ch. 6 Exercising an Option 109
Ch. 7 Models with Fixed Costs 129
Ch. 8 Models with Fixed and Variable Costs 153
Ch. 9 Models with Continuous Control Variables 176
Pt. III Instantaneous Control Models 197
Ch. 10 Regulated Brownian Motion 199
Ch. 11 Investment: Linear and Convex Adjustment Costs 225
Pt. IV Aggregation 251
Ch. 12 An Aggregate Model with Fixed Costs 253
A Continuous Stochastic Processes 283
B Optional Stopping Theorem 290
Notes 294
References 295
Part Index 303
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