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Investment and Demand Uncertainty


  • Luigi Guiso
  • Giuseppe Parigi


This paper investigates the effects of uncertainty on the investment decisions of a sample of Italian manufacturing firms, using information on the subjective probability distribution of future demand for firms' products according to the entrepreneurs. The results support the view that uncertainty weakens the response of investment to demand thus slowing down capital accumulation. Consistent with the predictions of the theory, there is considerable heterogeneity in the effect of uncertainty on investment: it is stronger for firms that cannot easily reverse investment decisions and for those with substantial market power. We show that the negative effect of uncertainty on investment cannot be explained by uncertainty proxying for liquidity constraints.

Suggested Citation

  • Luigi Guiso & Giuseppe Parigi, 1999. "Investment and Demand Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 185-227.
  • Handle: RePEc:oup:qjecon:v:114:y:1999:i:1:p:185-227.

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    References listed on IDEAS

    1. Wadhwani, Sushil B, 1987. "The Effects of Inflation and Real Wages on Employment," Economica, London School of Economics and Political Science, vol. 54(213), pages 21-40, February.
    2. Jennifer Hunt, 1996. "The Response of Wages and Actual Hours Worked to the Reduction of Standard Hours in Germany," Discussion Papers of DIW Berlin 138, DIW Berlin, German Institute for Economic Research.
    3. Brunello, Giorgio, 1989. "The Employment Effects of Shorter Working Hours: An Application to Japanese Data," Economica, London School of Economics and Political Science, vol. 56(224), pages 473-486, November.
    4. Linda Bell & Richard Freeman, 1994. "Why Do Americans and Germans Work Different Hours?," NBER Working Papers 4808, National Bureau of Economic Research, Inc.
    5. G Houpis, 1993. "The Effect of Lower Hours of Work on Wages and Employment," CEP Discussion Papers dp0131, Centre for Economic Performance, LSE.
    6. R. A. Hart & T. Sharot, 1978. "The Short-run Demand for Workers and Hours: A Recursive Model," Review of Economic Studies, Oxford University Press, vol. 45(2), pages 299-309.
    7. Earle, John S & Pencavel, John, 1990. "Hours of Work and Trade Unionism," Journal of Labor Economics, University of Chicago Press, vol. 8(1), pages 150-174, January.
    8. Booth, Alison & Ravallion, Martin, 1993. "Employment and Length of the Working Week in a Unionized Economy in which Hours of Work Influence Productivity," The Economic Record, The Economic Society of Australia, vol. 69(207), pages 428-436, December.
    9. Booth, Alison & Schiantarelli, Fabio, 1987. "The Employment Effects of a Shorter Working Week," Economica, London School of Economics and Political Science, vol. 54(214), pages 237-248, May.
    10. Calmfors, Lars, 1985. "Work sharing, employment and wages," European Economic Review, Elsevier, vol. 27(3), pages 293-309.
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    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity


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