Investment as a Process of Search

Optimal capital accumulation is analyzed in the face of ''structural uncertainty,'' in which the firm does not fully know its own profit function and can discover it only through further investment. It is demonstrated that, under structural uncertainty, capital accumulation is gradual even when adjustment costs are linear and not convex. It is further demonstrated that structural uncertainty creates an incentive to market research. An example is presented of structural uncertainty in which an additional price uncertainty has a negative effect on investment, contrary to the standard models. Structural uncertainty thus has important effects on investment, both quantitatively and qualitatively.