A dynamic model of the firm with uncertain earnings and adjustment costs

In this paper a stochastic dynamic model of the firm developed by Bensoussan and Lesourne is extended to allow for adjustment costs. The optimal solution is derived for different scenarios dependent on the shapes of the expected earnings function and the adjustment cost function, and on the different parameters of the model. It turns out that besides pure investment, dividend and savings policies, mixed policies can also be optimal for the firm. The latter do not occur in the solution of the Bensoussan and Lesourne model, and, therefore, the solutions derived in this paper come closer to reality.