An Equilibrium Model of Investment Under Uncertainty

We analyze the optimal investment decisions of heterogeneousfirms in a competitive, uncertain environment, characterizingfirms' investment strategies explicitly and deriving closed-formsolutions for firm value. Real option premia remain significant,and are even unmitigated relative to the standard partial-equilibriummodel when both are calibrated to observables. Firms consequentlydelay investment, choosing not to undertake some positive NPVprojects. We compare competitive behavior to that of a strategicmonopolist, and quantify the welfare loss associated with monopoly.Finally, the model predicts business cycle dependence on firmreturns, with returns negatively skewed during industry expansionsbut positively skewed in industry recessions.