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Investment and Uncertainty: A Theory-Based Empirical Approach

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  • Carlsson, Mikael

    (Department of Economics)

Abstract

This paper provides empirical evidence on the dynamic effects of uncertainty on firm-level capital accumulation. A novelty in this paper is that the firm-level uncertainty indicator is motivated and derived from a theoretical model, the neoclassical investment model with time to build. This model also serves as the base for the empirical work, where an error-correction approach is employed. I find a negative effect of uncertainty on capital accumulation, both in the short and the long run. This outcome cannot be explained by the model alone. Instead, the results suggest that the predominant mechanism at work stems from irreversibility constraints.

Suggested Citation

  • Carlsson, Mikael, 2004. "Investment and Uncertainty: A Theory-Based Empirical Approach," Working Paper Series 2004:17, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uunewp:2004_017
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    References listed on IDEAS

    as
    1. Mikael Carlsson & Stefan Laséen, 2005. "Capital Adjustment Patterns In Swedish Manufacturing Firms: What Model Do They Suggest?," Economic Journal, Royal Economic Society, vol. 115(506), pages 969-986, October.
    2. Hong Bo, 1999. "The Q theory of investment: does uncertainty matter," Research Report 99E07, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
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    8. Jacques Mairesse & Bronwyn H. Hall & Benoît Mulkay, 1999. "Firm-Level Investment in France and the United States: An Exploration of What We Have Learned in Twenty Years," Annals of Economics and Statistics, GENES, issue 55-56, pages 27-67.
    9. Mikael Carlsson, 2003. "Measures of Technology and the Short-run Response to Technology Shocks," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(4), pages 555-579, December.
    10. Chirinko, Robert S & Schaller, Huntley, 1995. "Why Does Liquidity Matter in Investment Equations?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 527-548, May.
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    15. repec:dgr:rugsom:99e07 is not listed on IDEAS
    16. Mikael Carlsson, 2007. "Investment and Uncertainty: A Theory‐based Empirical Approach," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(5), pages 603-617, October.
    17. Carruth, Alan & Dickerson, Andrew & Henley, Andrew, 2000. "What Do We Know about Investment under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-153, April.
    18. repec:adr:anecst:y:1999:i:55-56:p:02 is not listed on IDEAS
    19. Ulf von Kalckreuth, 2003. "Exploring the role of uncertainty for corporate investment decisions in Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 173-206, June.
    20. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    21. Bond, Stephen & Van Reenen, John, 2007. "Microeconometric Models of Investment and Employment," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 65, Elsevier.
    22. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Mellati, Ali, 2008. "Uncertainty and investment in private sector: An analytical argument and a review of the economy of Iran," MPRA Paper 26655, University Library of Munich, Germany.
    2. Manuel Buchholz & Lena Tonzer & Julian Berner, 2022. "Firm‐specific forecast errors and asymmetric investment propensity," Economic Inquiry, Western Economic Association International, vol. 60(2), pages 764-793, April.
    3. Byrne, Joseph P & Spaliara, Marina-Eliza & Serafeim, Tsoukas, 2014. "Firm survival, uncertainty and financial frictions: Is there a financial uncertainty accelerator?," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-62, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Fredrik Johansson-Tormod & Anders Klevmarken, 2022. "Explaining the Size and Nature of Response in a Survey on Health Status and Economic Standard," International Journal of Microsimulation, International Microsimulation Association, vol. 15(1), pages 63-77.
    5. Byrne, Joseph P & Spaliara, Marina-Eliza & Serafeim, Tsoukas, 2015. "Firm survival, uncertainty and financial frictions: Is there a financial uncertainty accelerator?," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-68, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Joseph P. Byrne & Marina-Eliza Spaliara & Serafeim Tsoukas, 2016. "Firm Survival, Uncertainty, And Financial Frictions: Is There A Financial Uncertainty Accelerator?," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 375-390, January.
    7. Mikael Carlsson, 2007. "Investment and Uncertainty: A Theory‐based Empirical Approach," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(5), pages 603-617, October.
    8. Berg, Lennart & Berger, Tommy, 2005. "The Q theory and the Swedish housing market –an empirical test," Working Paper Series 2005:19, Uppsala University, Department of Economics.
    9. Mohn, Klaus & Misund, Bård, 2009. "Investment and uncertainty in the international oil and gas industry," Energy Economics, Elsevier, vol. 31(2), pages 240-248, March.

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    More about this item

    Keywords

    Investment; Uncertainty; Dynamic Panel Data Models;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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