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Capital depreciation and the investment-uncertainty relationship: The role of symmetric adjustment costs

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  • Tamotsu Nakamura

    (Kobe University)

Abstract

Some recent contributions (Femminis, 2007 Nakamura, 2002) demonstrate the important roles of capital depreciation in the investment-uncertainty relationship. This paper highlights the role of symmetric adjustment costs in the case that capital depreciates completely after finite periods. Various uncertainty-investment relationships emerge depending on the curvature of convex adjustment cost function. While investment decreases with uncertainty if the curvature is small, it increases with uncertainty if the curvature is large. If the curvature is in between, the investment-uncertainty relationship shows an inverted U-shaped curve: investment first increases and then decreases with uncertainty.

Suggested Citation

  • Tamotsu Nakamura, 2007. "Capital depreciation and the investment-uncertainty relationship: The role of symmetric adjustment costs," Economics Bulletin, AccessEcon, vol. 4(30), pages 1-8.
    • Handle: RePEc:ebl:ecbull:eb-07d90001
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    References listed on IDEAS

    as
    1. Nakamura, Tamotsu, 2002. "Finite durability of capital and the investment-uncertainty relationship," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 51-56, May.
    2. Sarkar, Sudipto, 2000. "On the investment-uncertainty relationship in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 219-225, February.
    3. Femminis, Gianluca, 2008. "Risk-aversion and the investment-uncertainty relationship: The role of capital depreciation," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 585-591, March.
    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.
    5. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
    6. Mauer, David C. & Ott, Steven H., 1995. "Investment under Uncertainty: The Case of Replacement Investment Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(4), pages 581-605, December.
    7. Saltari, Enrico & Ticchi, Davide, 2005. "Risk-aversion and the investment-uncertainty relationship: a comment," Journal of Economic Behavior & Organization, Elsevier, vol. 56(1), pages 121-125, January.
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    Cited by:

    1. Huberts, Nick F.D. & Rossi Silveira, Rafael, 2023. "How economic depreciation shapes the relationship of uncertainty with investments’ size & timing," International Journal of Production Economics, Elsevier, vol. 260(C).

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    More about this item

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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