Investment and uncertainty with recursive preferences
This paper analyses the relationship between uncertainty and investment when firms are risk averse and have a costant return to scale technology. Using recursive preferences, the paper demonstrates that not only the degree of risk aversion is important in determining the sign of the investment uncertainty relationship but that the intertemporal substitution elasticity also plays a crucial role. The model presented suggests the existence of a positive relationship between investment and uncertainty for reasonable values of the parameters. In the second part of the paper we extend the analysis taking into consideration the presence of adjustment costs in the investment process. Except for particular values of the preference parameters, the uncertainty-investment relationship has a not a definite sign anymore.
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