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Lags, Convexity and the Investment-Uncertainty Relationship

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  • Yishay D. Maoz

Abstract

The effect that investment lags has on the uncertainty-investment relationship is studied by modifying the Bar-Ilan and Strange (1996) model in a manner that enables analytical solution. It turns out that: (i) If the time lag is sufficiently small, uncertainty affects investment negatively; (ii) A sufficiently large time lag engenders an inverse u-shape relationship between the degree of uncertainty and the profit level that triggers investment; (iii) When such an inverse u- shape exists, the higher is the length of the time lag (or the degree of profit convexity) the wider is the range of a positive uncertainty- investment relationship.

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File URL: http://128.118.178.162/eps/get/papers/0510/0510001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series General Economics and Teaching with number 0510001.

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Length: 17 pages
Date of creation: 06 Oct 2005
Date of revision:
Handle: RePEc:wpa:wuwpgt:0510001

Note: Type of Document - pdf; pages: 17
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Web page: http://128.118.178.162

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Keywords: Investment; Uncertainty; Time to build;

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  1. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  2. Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-22, June.
  3. 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.
  4. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
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