Optimal Firm Behaviour in the Context of Technological Progress and a Business Cycle

This work deals with optimal company behaviour in the context of technological progress and fluctuating demand in an "optimal control model" of a company. The investment, dividend and financing behaviour of a firm is described in a dynamic optimization model and the "maximum principle" is used to deduce optimal policy after two government variables and some government constraints have been added to it. In the aspect of the model with a fluctuating demand for the firm's products, the conditions for, and the length of, a "zero-investment period" are derived, as well as the role of debt in surviving a depression. For the aspect of the model with labour-augmenting technological progress, a new version of the maximum principle is derived in order to handle the old structure of the model. Conditions are derived under which the optimal lifetime of capital is constant and special attention is given to the shadow price interpretation of auxiliary variables in optimal control models with pure state constraints. In the final section of the book, the merits and weaknesses of optimization models for use as tools in a dynamic theory of companies and business are discussed.