Pursuing the Wrong Options? Adjustment Costs and the Relationship between Uncertainty and Capital Accumulation
Abstractbel and Eberly (1999) show that the effect of uncertainty on long run capital accumulation is ambiguous in a real options model with irreversible investment. We show that a higher level of uncertainty tends to reduce expected capital stock levels in a model with strictly convex adjustment costs. Simulations suggest that this negative impact of uncertainty on capital accumulation may be substantial. We also provide some intuition for this result.
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Bibliographic InfoPaper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 449.
Length: 11 pages
Date of creation: 17 May 2010
Date of revision:
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Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Uncertainty; real options; adjustment costs; capital accumulation.;
Other versions of this item:
- Bond, Stephen R. & Söderbom, Måns & Wu, Guiying, 2011. "Pursuing the wrong options? Adjustment costs and the relationship between uncertainty and capital accumulation," Economics Letters, Elsevier, vol. 111(3), pages 249-251, June.
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
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