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The Role of a Variable Input in the Relationship between Investment and Uncertainty

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  • Kwanho Shin
  • Jaewoo Lee

Abstract

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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  • Kwanho Shin & Jaewoo Lee, 2000. "The Role of a Variable Input in the Relationship between Investment and Uncertainty," American Economic Review, American Economic Association, vol. 90(3), pages 667-680, June.
    • Handle: RePEc:aea:aecrev:v:90:y:2000:i:3:p:667-680
    Note: DOI: 10.1257/aer.90.3.667
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    References listed on IDEAS

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    1. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862, Elsevier.
    2. Abel, Andrew B & Eberly, Janice C, 1994. "A Unified Model of Investment under Uncertainty," American Economic Review, American Economic Association, vol. 84(5), pages 1369-1384, December.
    3. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    4. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    5. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-288, March.
    6. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    7. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
    8. Sakellaris, Plutarchos, 1994. "A Note on Competitive Investment under Uncertainty: Comment," American Economic Review, American Economic Association, vol. 84(4), pages 1107-1112, September.
    9. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
    10. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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