Terminal-Year Investment In Finite-Horizon Planninq Models (Notes & Comments)

Richard C. Porter

Abstract


A common problem of finite-horizon planning models is that
there is no logical determinant of investment in the final year (s).
Where post-horizon production is not valued by a model, later-year
investment, whose sole function is creation of capacity for post-horizon
output, looks as incongruous as last rites for an atheist. A number of
artificial devices have been developed to handle this difficulty1, but
one predominates: to assume that terminal-year investment is a function
of terminal-year output. The purpose of this note is to show: 1) how
varied and arbitrary are the assumed functions (Section I); 2) that the
terminal-year variables and the apparent feasibility of the resulting
Plan are highly sensitive to the choice of function (Section II); and 3)
that the arbitrariness of functional form is inevitable in the sense
that generally acceptable criteria do not much restrict the choice
(Section III). Throughout this note, we shall neglect four complexities
that are not essential to the problem at hand. One, the marginal
capital-output ratio (

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DOI: https://doi.org/10.30541/v10i2pp.272-280

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