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Risk-aversion and the investment-uncertainty relationship: The role of capital depreciation

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  • Femminis, Gianluca

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Some recent contributions [Nakamura, T., 1999. Risk-aversion and the uncertainty-investment relationship: a note. Journal of Economic Behavior and Organization 38, 357-363; Saltari, E., Ticchi, D., 2005. Risk-aversion and the investment-uncertainty relationship: a comment. Journal of Economic Behavior and Organization 56, 121-125] suggest that investments react negatively to uncertainty when the risk aversion index characterizing firm's preferences is lower than one but higher than the labour income share of output. We show that this result crucially depends on the assumption of complete capital depreciation after production. When realistic values for the capital depreciation parameter are taken into account, the investment-uncertainty relation is negative for values of the risk-aversion index larger than unity.

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  • 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.
  • Handle: RePEc:eee:jeborg:v:65:y:2008:i:3-4:p:585-591
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    1. Luigi Guiso & Giuseppe Parigi, 1999. "Investment and Demand Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 185-227.
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    7. Nakamura, Tamotsu, 1999. "Risk-aversion and the uncertainty-investment relationship: a note," Journal of Economic Behavior & Organization, Elsevier, vol. 38(3), pages 357-363, March.
    8. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
    9. Robert R. Bliss & Nikolaos Panigirtzoglou, 2004. "Option-Implied Risk Aversion Estimates," Journal of Finance, American Finance Association, vol. 59(1), pages 407-446, February.
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    11. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
    12. 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. Inekwe John Nkwoma, 2014. "Business Cycle Variability and Growth Linkage," Monash Economics Working Papers 38-14, Monash University, Department of Economics.
    2. Ekaterina E. Kuzmicheva, 2014. "The Influence Of Financial Constraints And Attitude Towards Risk In Corporate Investment Decisions," HSE Working papers WP BRP 36/FE/2014, National Research University Higher School of Economics.
    3. Gianluca Femminis, 2012. "Risk aversion heterogeneity and the investment-uncertainty relationship," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq1260, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    4. Barbara Annicchiarico & Alessandra Pelloni & Fabrizio Valenti, 2016. "Volatility and Growth with Recursive Preferences," CEIS Research Paper 387, Tor Vergata University, CEIS, revised 24 Jun 2016.
    5. 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.
    6. repec:ebl:ecbull:v:4:y:2007:i:30:p:1-8 is not listed on IDEAS

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