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The Role of a Variable Input in the Relationship Between Investment and Uncertainty

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Author Info
Lee, J.
Shin, K.

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Abstract

For a perfectly competitive firm with a constant returns to scale techenology, a greater price uncertainty has been shown to increase investment even in the presence of irrecersible investment. We show, however, that the option value generated by a one-time fixed cost can cause increasibg uncertainty to reduce investment from a positive value to zero.

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Publisher Info
Paper provided by California Irvine - School of Social Sciences in its series Papers with number 97-98-11.

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Length: 20 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:fth:calirv:97-98-11

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Postal: UNIVERSITY OF CALIFORNIA IRVINE, SCHOOL OF SOCIAL SCIENCES, IRVINECALIFORNIA 91717 U.S.A.

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Related research
Keywords: INVESTMENTS ; RISK;

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity

References listed on IDEAS
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  1. Sakellaris, Plutarchos, 1994. "A Note on Competitive Investment under Uncertainty: Comment," American Economic Review, American Economic Association, vol. 84(4), pages 1107-12, September. [Downloadable!] (restricted)
  2. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  3. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October. [Downloadable!] (restricted)
  4. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November. [Downloadable!] (restricted)
  6. Abel, Andrew B & Eberly, Janice C, 1994. "A Unified Model of Investment under Uncertainty," American Economic Review, American Economic Association, vol. 84(5), pages 1369-84, December. [Downloadable!] (restricted)
    Other versions:
  7. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-88, March. [Downloadable!] (restricted)
  8. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September. [Downloadable!] (restricted)
  9. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-2), pages 1-54. [Downloadable!]
  10. 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. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gyan Pradhan & Zeljan Schuster & Kamal P. Upadhyaya, 2004. "Exchange rate uncertainty and the level of investment in selected South-east Asian countries," Applied Economics, Taylor and Francis Journals, vol. 36(19), pages 2161-2165, September. [Downloadable!] (restricted)
  2. Bayraktar, Nihal & Fofack, Hippolyte, 2007. "Specification of investment functions in Sub-Saharan Africa," Policy Research Working Paper Series 4171, The World Bank. [Downloadable!]
  3. Joseph P. Byrne & E. Philip Davis, 2003. "Panel Estimation Of The Impact Of Exchange Rate Uncertainty On Investment In The Major Industrial Countries," Economics and Finance Discussion Papers 03-05, Economics and Finance Section, School of Social Sciences, Brunel University. [Downloadable!]
    Other versions:
  4. Nicholas Bloom, 2000. "The dynamic effects of real options and irreversibility on investment and labour demand," IFS Working Papers W00/15, Institute for Fiscal Studies. [Downloadable!]
  5. Justin Y. Lin & Yingyi Tsai & Ching-Tang Wu, 2003. "Optimal Capital Investment, Uncertainty and Outsourcing," Microeconomics Working Papers 450, East Asian Bureau of Economic Research. [Downloadable!]
  6. Serven, Luis, 2002. "Real exchange rate uncertainty and private investment in developing countries," Policy Research Working Paper Series 2823, The World Bank. [Downloadable!]
  7. Sunil Kanwar, 2006. "Innovation and Intellectual Property Rights," Working papers 142, Centre for Development Economics, Delhi School of Economics. [Downloadable!]
  8. Joseph P. Byrne & E. Philip Davis, 2005. "Investment and Uncertainty in the G7," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(1), pages 1-32, April. [Downloadable!] (restricted)
    Other versions:
  9. 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 Department. [Downloadable!]
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