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Irreversibility, Uncertainty, and Cyclical Investment

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Ben S. Bernanke

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Abstract

The optimal timing of real investment is studied under the assumptions that investment is irreversible and that new information about returns is arriving over time. Investment should be undertaken in this case only when the costs of deferring the project exceed the expected value of information gained by waiting. Uncertainty, because it increases the value of waiting for new information, retards the current rate of investment. The nature of investor's optimal reactions to events whose implications are resolved over time is a possible explanation of the instability of aggregate investment over the business cycle.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0502.

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Date of creation: Jul 1980
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Handle: RePEc:nbr:nberwo:0502

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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. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug.. [Downloadable!] (restricted)
  2. James Tobin & William C. Brainard, 1976. "Asset Markets and the Cost of Capital," Cowles Foundation Discussion Papers 427, Cowles Foundation, Yale University. [Downloadable!]
  3. Paul A. Samuelson, 1934. "A Synthesis of the Principle of Acceleration and the Multiplier," Journal of Political Economy, University of Chicago Press, vol. 47, pages 786. [Downloadable!] (restricted)
  4. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May. [Downloadable!] (restricted)
  5. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January. [Downloadable!] (restricted)
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