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Investment under uncertainty: The nature of demand shocks and the expected profitability of capital

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  • Gil, Pedro Mazeda

Abstract

This paper analyses the disparity regarding the sign of the investment–uncertainty relationship in models of investment under symmetric adjustment costs. That sign is determined by the shape of the profit function, which is related to the nature of demand shocks.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 114 (2012)
Issue (Month): 2 ()
Pages: 154-156

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Handle: RePEc:eee:ecolet:v:114:y:2012:i:2:p:154-156

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Demand uncertainty; Expected profitability of capital; Jensen’s inequality;

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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  2. 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.
  3. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December.
  4. Xin Guo & Jianjun Miao & Erwan Morellec, 2002. "Irreversible Investment with Regime Shifts," FAME Research Paper Series rp99, International Center for Financial Asset Management and Engineering.
  5. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  6. Lee, J. & Shin, K., 1997. "The Role of a Variable Input in the Relationship Between Investment and Uncertainty," Papers 97-98-11, California Irvine - School of Social Sciences.
  7. John Van Reenen & Nick Bloom & Steve Bond, 2006. "Uncertainty and investment dynamics," LSE Research Online Documents on Economics 2645, London School of Economics and Political Science, LSE Library.
  8. Abel, Andrew B. & Eberly, Janice C., 1999. "The effects of irreversibility and uncertainty on capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 339-377, December.
  9. 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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