The effect that investment lags have on the uncertainty-investment relationship is studied by modifying the Bar-Ilan and Strange (1996) model to enable an analytical solution. The following results emerge: (i) If the time lag is sufficiently small, uncertainty affects investment negatively; (ii) A sufficiently large time lag gives rise to an inverse U-shape uncertainty-investment relationship; (iii) When such an inverse U-shape exists, the longer the time lag (or the larger the degree of profit convexity), the wider the range of a positive uncertainty-investment relationship.
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Find related papers by JEL classification: D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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Bar-Ilan, Avner & Strange, William C, 1996.
"Investment Lags,"
American Economic Review,
American Economic Association, vol. 86(3), pages 610-22, June.
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