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Risk-aversion and the investment-uncertainty relationship: The role of capital depreciation

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  • Femminis, Gianluca

Abstract

Some recent contributions [Nakamura, T., 1999. Risk-aversion and the uncertainty-investment relationship: a note. Journal of Economic Behavior and Organization 38, 357-363; Saltari, E., Ticchi, D., 2005. Risk-aversion and the investment-uncertainty relationship: a comment. Journal of Economic Behavior and Organization 56, 121-125] suggest that investments react negatively to uncertainty when the risk aversion index characterizing firm's preferences is lower than one but higher than the labour income share of output. We show that this result crucially depends on the assumption of complete capital depreciation after production. When realistic values for the capital depreciation parameter are taken into account, the investment-uncertainty relation is negative for values of the risk-aversion index larger than unity.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 65 (2008)
Issue (Month): 3-4 (March)
Pages: 585-591

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Handle: RePEc:eee:jeborg:v:65:y:2008:i:3-4:p:585-591

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  1. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, Elsevier, vol. 5(2), pages 258-266, October.
  2. Normandin, Michel & St-Amour, Pascal, 1996. "Substitution, Risk Aversion, Taste Shocks and Equity Premia," Cahiers de recherche, Université Laval - Département d'économique 9606, Université Laval - Département d'économique.
  3. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 263-86, April.
  4. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  5. Luigi Guiso & Giuseppe Parigi, 1999. "Investment And Demand Uncertainty," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(1), pages 185-227, February.
  6. Ferderer, J Peter, 1993. "The Impact of Uncertainty on Aggregate Investment Spending: An Empirical Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 25(1), pages 30-48, February.
  7. Saltari, Enrico & Ticchi, Davide, 2005. "Risk-aversion and the investment-uncertainty relationship: a comment," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 56(1), pages 121-125, January.
  8. Paola Caselli & Patrizio Pagano & Fabiano Schivardi, 2003. "Uncertainty and the slowdown of capital accumulation in Europe," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(1), pages 79-89.
  9. Nakamura, Tamotsu, 1999. "Risk-aversion and the uncertainty-investment relationship: a note," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 38(3), pages 357-363, March.
  10. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 73(1), pages 228-33, March.
  11. Robert R. Bliss & Nikolaos Panigirtzoglou, 2004. "Option-Implied Risk Aversion Estimates," Journal of Finance, American Finance Association, American Finance Association, vol. 59(1), pages 407-446, 02.
  12. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
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Cited by:
  1. repec:ebl:ecbull:v:4:y:2007:i:30:p:1-8 is not listed on IDEAS
  2. Tamotsu Nakamura, 2007. "Capital depreciation and the investment-uncertainty relationship: The role of symmetric adjustment costs," Economics Bulletin, AccessEcon, vol. 4(30), pages 1-8.
  3. Gianluca Femminis, 2012. "Risk aversion heterogeneity and the investment-uncertainty relationship," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq1260, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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