The Role of a Variable Input in the Relationship between Investment and Uncertainty
Caballero (1991) shows that a larger uncertainty only increases the investment of a perfectly competitive firm with a constant returns to scale technology. We show, however, that the option value generated by a one-time fixed cost can cause the increasing uncertainty to reduce investment from a positive value to zero.
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Volume (Year): 90 (2000)
Issue (Month): 3 (June)
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