I consider the problem of the design of an optimal self-selection contract scheme for a principal who is buying a good from an agent which has the opportunity of making a cost-reducing unobservable investment prior to the contracting stage. Because of a hold-up problem, the agent will randomizes...

This paper expands on the theory of irreversible investment under uncertainty, incorporating capacity constraints and uncertainty of input price. No restriction on the demand elasticity value is imposed. Assuming that the input price follows a geometric Brownian motion, the optimal irreversible...