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The Role of a Variable Input in the Relationship between Investment and Uncertainty

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  • Kwanho Shin
  • Jaewoo Lee

Abstract

For a perfectly competitive firm with a constant returns to scale techenology, a greater price uncertainty has been shown to increase investment even in the presence of irrecersible investment. We show, however, that the option value generated by a one-time fixed cost can cause increasibg uncertainty to reduce investment from a positive value to zero.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 90 (2000)
Issue (Month): 3 (June)
Pages: 667-680

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Handle: RePEc:aea:aecrev:v:90:y:2000:i:3:p:667-680

Note: DOI: 10.1257/aer.90.3.667
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  1. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862 Elsevier.
  2. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  3. Pindyck, Robert S., 1986. "Irreversible investment, capacity choice, and the value of the firm," Working papers 1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
  5. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  6. Andrew B. Abel & Janice C. Eberly, 1993. "A Unified Model of Investment Under Uncertainty," NBER Working Papers 4296, National Bureau of Economic Research, Inc.
  7. Sakellaris, Plutarchos, 1994. "A Note on Competitive Investment under Uncertainty: Comment," American Economic Review, American Economic Association, vol. 84(4), pages 1107-12, September.
  8. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  9. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-88, March.
  10. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
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Citations

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Cited by:
  1. Gil, Pedro Mazeda, 2012. "Investment under uncertainty: The nature of demand shocks and the expected profitability of capital," Economics Letters, Elsevier, vol. 114(2), pages 154-156.
  2. Bayraktar, Nihal & Fofack, Hippolyte, 2007. "Specification of investment functions in Sub-Saharan Africa," Policy Research Working Paper Series 4171, The World Bank.
  3. Nicholas Bloom, 2000. "The dynamic effects of real options and irreversibility on investment and labour demand," IFS Working Papers W00/15, Institute for Fiscal Studies.
  4. Joseph P. Byrne & E. Philip Davis, 2005. "Investment and Uncertainty in the G7," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(1), pages 1-32, April.
  5. Gyan Pradhan & Zeljan Schuster & Kamal Upadhyaya, 2004. "Exchange rate uncertainty and the level of investment in selected South-east Asian countries," Applied Economics, Taylor & Francis Journals, vol. 36(19), pages 2161-2165.
  6. Gianluca Femminis, 2012. "Risk aversion heterogeneity and the investment-uncertainty relationship," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq1260, UniversitĂ  Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  7. Hagspiel, V., 2011. "Flexibility in technology choice: A real options approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5258278, Tilburg University.
  8. Elena Bontempi & Roberto Golinelli & Giuseppe Parigi, 2007. "Why demand uncertainty curbs investment: Evidence froma a panel of Italian manufacturing firms," Temi di discussione (Economic working papers) 621, Bank of Italy, Economic Research and International Relations Area.
  9. Serven, Luis, 2002. "Real exchange rate uncertainty and private investment in developing countries," Policy Research Working Paper Series 2823, The World Bank.
  10. Drakos, Konstantinos & Goulas, Eleftherios, 2006. "Investment and conditional uncertainty: The role of market power, irreversibility, and returns-to-scale," Economics Letters, Elsevier, vol. 93(2), pages 169-175, November.
  11. Magda Bianco & Maria Bontempi & Roberto Golinelli & Giuseppe Parigi, 2013. "Family firms’ investments, uncertainty and opacity," Small Business Economics, Springer, vol. 40(4), pages 1035-1058, May.
  12. Sunil Kanwar, 2006. "Innovation and Intellectual Property Rights," Working papers 142, Centre for Development Economics, Delhi School of Economics.

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