Uncertainty, Investment, and Industry Evolution
The authors study the effects of industrywide and idiosyncratic uncertainty on the entry of firms, total investment, and prices in a competitive industry with irreversible investment. They determine entry decisions and the resulting industry equilibrium and its characteristics, emphasizing effects of different sources of uncertainty. The authors stress how irreversibility affects the equilibrium distribution of prices, which in turn affects entry. Finally, they use four-digit U.S. manufacturing data to measure the extent of uncertainty and gauge its importance for investment. The authors find that a doubling of industrywide uncertainty raises the required rate of return on new capital by about 20 percent. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Volume (Year): 37 (1996)
Issue (Month): 3 (August)
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References listed on IDEAS
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- Pindyck, Robert, 1989.
"Irreversibility, uncertainty, and investment,"
Policy Research Working Paper Series
294, The World Bank.
- Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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"Irreversible investment, capacity choice, and the value of the firm,"
1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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- Ricardo J. Caballero, 1997.
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6264, National Bureau of Economic Research, Inc.
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"Entry And Exit Decisions Under Uncertainty,"
91, Princeton, Department of Economics - Financial Research Center.
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- Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
- Majd, Saman & Pindyck, Robert S., 1987.
"Time to build, option value, and investment decisions,"
Journal of Financial Economics,
Elsevier, vol. 18(1), pages 7-27, March.
- Saman Majd & Robert S. Pindyck, 1985. "Time to Build, Option Value, and Investment Decisions," NBER Working Papers 1654, National Bureau of Economic Research, Inc.
- Giuseppe Bertola & Ricardo J. Caballero, 1991.
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3865, National Bureau of Economic Research, Inc.
- Leahy, J.V., 1991. "The Optimality of Myopic Behaviour in a Competitive Model of Entry and Exit," Harvard Institute of Economic Research Working Papers 1566, Harvard - Institute of Economic Research.
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