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Investment under Uncertainty, Irreversibility and the Arrival of Information over Time

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Author Info
Demers, Michel
Abstract

In this paper, the author considers a risk-neutral competitive firm which is uncertain about the true state of demand. He builds upon K. J. Arrow (1968) by demonstrating that the irreversibility of investment in physical capital together with the anticipation of receiving information and of learning the state of demand lead to (1) cautious investment behavior and, hence, to lower investment levels; (2) a time-varying risk premium or marginal "adjustment cost"; and (3) a gradual adjustment of the capital stock to the desired level. Copyright 1991 by The Review of Economic Studies Limited.

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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 58 (1991)
Issue (Month): 2 (April)
Pages: 333-50
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Handle: RePEc:bla:restud:v:58:y:1991:i:2:p:333-50

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  2. Kotseva, Rossitsa & Vettas, Nikolaos, 2005. "Foreign Direct Investment and Exports Dynamics with Demand Learning," CEPR Discussion Papers 5262, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Joseph P. Byrne & Julia Darby & Ronald MacDonald, 2006. "US Trade and Exchange Rate Volatility: A Real Sectoral Bilateral Analysis," Working Papers 2006_9, Department of Economics, University of Glasgow. [Downloadable!]
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  4. Hjalmar Böhm & Michael Funke, 1999. "The Uncertainty-Investment Relationship," Quantitative Macroeconomics Working Papers 19903, Hamburg University, Department of Economics. [Downloadable!]
  5. Hjalmar Böhm & Michael Funke & Nikolaus A. Siegfried, 1999. "Discovering the Link between Uncertainty and Investment - Microeconometric Evidence from Germany," Quantitative Macroeconomics Working Papers 19906, Hamburg University, Department of Economics. [Downloadable!]
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  6. Rose Cunningham, 2004. "Investment, Private Information, and Social Learning: A Case Study of the Semiconductor Industry," Working Papers 04-32, Bank of Canada. [Downloadable!]
  7. Sumru Altug & Fanny S. Demers & Michel Demers, 2001. "The Impact of Tax Risk and Persistence on Investment Decisions," Economics Bulletin, Economics Bulletin, vol. 5, pages 1-5. [Downloadable!]
  8. Helmut Herwartz & Henning Weber, 2007. "Exchange Rate Uncertainty and Trade Growth - A Comparison of Linear and Nonlinear (Forecasting) Models," SFB 649 Discussion Papers SFB649DP2007-042, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  9. Cotter, John & Bredin, Don, 2005. "Volatility and Irish Exports," MPRA Paper 3522, University Library of Munich, Germany. [Downloadable!]
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  10. Yu-Fu Chen & Michael Funke, 2005. "Product Market Competition, Investment and Employment-Abundant versus Job-Poor Growth: A Real Options Perspective," Quantitative Macroeconomics Working Papers 20510, Hamburg University, Department of Economics. [Downloadable!]
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  11. Rose Cunningham, 2004. "Investment, Private Information and Social Learning: A Case Study of the Semiconductor Industry," Macroeconomics 0409021, EconWPA. [Downloadable!]
  12. Bartholomew Moore & Huntley Schaller, 2001. "Persistent and Transitory Shocks, Learning, and Investment Dynamics," Carleton Economic Papers 01-02, Carleton University, Department of Economics. [Downloadable!]
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  13. N. Mayor & P. Schonbucher & P.Wilmott & A.E. Whalley & D. Epstein, 1999. "The Value of Market Research When a Firm is Learning: Real Option Pricing and Optimal Filtering," OFRC Working Papers Series 1999mf13, Oxford Financial Research Centre. [Downloadable!]
  14. Raj Chetty, 2004. "Interest Rates and Backward-Bending Investment," NBER Working Papers 10354, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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