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Investment And Demand Uncertainty

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Author Info
Luigi Guiso
Giuseppe Parigi

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Abstract

This paper investigates the effects of uncertainty on the investment decisions of a sample of Italian manufacturing firms, using information on the subjective probability distribution of future demand for firms' products according to the entrepreneurs. The results support the view that uncertainty weakens the response of investment to demand thus slowing down capital accumulation. Consistent with the predictions of the theory, there is considerable heterogeneity in the effect of uncertainty on investment: it is stronger for firms that cannot easily reverse investment decisions and for those with substantial market power. We show that the negative effect of uncertainty on investment cannot be explained by uncertainty proxying for liquidity constraints. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Publisher Info
Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 114 (1999)
Issue (Month): 1 (February)
Pages: 185-227
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Handle: RePEc:tpr:qjecon:v:114:y:1999:i:1:p:185-227

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