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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.

Suggested Citation

  • Yishay D. Maoz, 2005. "Lags, Convexity and the Investment-Uncertainty Relationship," General Economics and Teaching 0510001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpgt:0510001
    Note: Type of Document - pdf; pages: 17
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/get/papers/0510/0510001.pdf
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    References listed on IDEAS

    as
    1. Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-622, June.
    2. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    3. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Investment; Uncertainty; Time to build;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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