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A neoclassical model of investment behavior is developed wherein firms are assumed to maximize the expected present value of net revenue under Leontief technology. Prices and yields are assumed to be stochastic. This framework yields investment as a function of the expected present value of the output from one unit of capital and the variance of the expected value. This theory is applied to investment in the almond industry. The model outperforms both a model without uncertainty and one with neither uncertainty nor adjustment costs using in-sample and out-of-sample tests. Copyright 1989 by MIT Press.
Dorfman et al. (Mon,) studied this question.