Unpublished memorandum, 2013.
where is a Wiener process. The process represents a constant return-to-scale production opportunity. The amount of investment in production is determined endogenously.
The parameters of the production process can themselves be stochastic, reflecting the fact that production technology evolves in an unpredictable manner. It is assumed that their behavior is driven by a Markov state variable . The dynamics of the state variable, which can be interpreted as representing the state of the production technology, is given by
where is a Wiener process ...