Irreversible investment with random delay and partial prepayment

Abstract

Classical irreversible investment problem admits an optimal strategy of threshold type. But there is no consensus on how the investor should adjust the threshold, if there is an implementation delay. By formulating a general problem with random delay and partial prepayment, we find that the effect of delay can be opposite for different prepayment rates. Besides, although the constant delay model is commonly used, we argue that it is a reasonable approximation only if the discount rate is small.