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Variations in the Effect of Uncertainty on Different Types of Investment: An Empirical Investigation

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  • Goel, Rajeev K
  • Ram, Rati

Abstract

Several recent studies, including those by Pindyck (1991), Pindyck and Solimano (1993), Dixit and Pindyck (1994), Episcopos (1995), and Abel et al. (1996), suggest an important linkage between the effect of uncertainty on investment and the irreversibility of the latter. This paper broadly follows the foregoing tradition, but makes the point that it should be possible to distinguish between investments with different degrees of irreversibility and to relate the effect of uncertainty with the degree of investment irreversibility. A simple empirical illustration is provided by using pooled annual data for 12 OECD countries and estimating fixed-effects models for different types of investments. Although caution is appropriate in interpreting the estimates, the evidence suggests that the adverse effect of uncertainty is more severe on investments that have a greater degree of irreversibility. Copyright 1999 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

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  • Goel, Rajeev K & Ram, Rati, 1999. "Variations in the Effect of Uncertainty on Different Types of Investment: An Empirical Investigation," Australian Economic Papers, Wiley Blackwell, vol. 38(4), pages 481-492, December.
  • Handle: RePEc:bla:ausecp:v:38:y:1999:i:4:p:481-92
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    Citations

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    Cited by:

    1. Mark J. Koetse & Henri L.F. de Groot & Raymond J.G.M. Florax, 2006. "The Impact of Uncertainty on Investment: A Meta-Analysis," Tinbergen Institute Discussion Papers 06-060/3, Tinbergen Institute.
    2. Konstantinos Drakos, 2006. "A note on uncertainty and investment across the spectrum of irreversibility," Applied Economics Letters, Taylor & Francis Journals, vol. 13(13), pages 873-876.
    3. Mark J. Koetse & Henri L.F. de Groot & Raymond J.G.M. Florax, 2011. "A Meta-Regression Analysis of the Investment–Uncertainty Relationship," Chapters,in: Improving Energy Efficiency through Technology, chapter 7 Edward Elgar Publishing.
    4. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38766, University Library of Munich, Germany.
    5. Masino, Serena, 2013. "Macro-Institutional Instability and the Incentive to Innovate," MPRA Paper 45938, University Library of Munich, Germany.
    6. Guido Fioretti, 2005. "A Model of Primary and Secondary Waves in Investment Cycles," Computational Economics, Springer;Society for Computational Economics, vol. 24(4), pages 357-381, June.
    7. Ibrahim, Mansor H. & Ahmed, Huson Joher Ali, 2014. "Permanent and transitory oil volatility and aggregate investment in Malaysia," Energy Policy, Elsevier, vol. 67(C), pages 552-563.
    8. Goel, Rajeev K. & Ram, Rati, 2001. "Irreversibility of R&D investment and the adverse effect of uncertainty: Evidence from the OECD countries," Economics Letters, Elsevier, vol. 71(2), pages 287-291, May.
    9. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38830, University Library of Munich, Germany.
    10. Konstantinos Drakos, 2012. "Extent and intensity of investment with multiple capital goods," Applied Economics, Taylor & Francis Journals, vol. 44(22), pages 2799-2810, August.
    11. Gerald Stuber, 2001. "Implications of Uncertainty about Long-Run Inflation and the Price Level," Staff Working Papers 01-16, Bank of Canada.

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