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To Buy or Not to Buy? Uncertainty, Irreversibility and Heterogeneous Investment Dynamics in Italian Company Data

  • Domenico Lombardi
  • Stephen Bond
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    This study tests for the presence of real options effects induced by uncertainty and (partial) irreversibility on fixed capital investment using Italian company data. The approach recognizes that firm-level investment spending may, itself, be aggregated over multiple investment decisions in separate types of capital goods and emphasizes effects of uncertainty on short-run investment dynamics. Using a survey-based measure of uncertainty related to the assessment of managers responsible for the firms' investment plans, the study finds evidence of heterogeneous and nonlinear dynamics pointing to a slower adjustment of investment in response to demand shocks at higher levels of uncertainty. The results also point to an additional source of nonlinearity originating from a convex response of investment to demand shocks.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/104.

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    Length: 29
    Date of creation: 01 Jun 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/104
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    6. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
    7. Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
    8. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
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    10. Bond, Stephen & Van Reenen, John, 2007. "Microeconometric Models of Investment and Employment," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 65 Elsevier.
    11. Mark Doms & Timothy Dunne, 1994. "Capital Adjustment Patterns in Manufacturing Plants," Working Papers 94-11, Center for Economic Studies, U.S. Census Bureau.
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    17. Dixit, Avinash, 1997. "Investment and Employment Dynamics in the Short Run and the Long Run," Oxford Economic Papers, Oxford University Press, vol. 49(1), pages 1-20, January.
    18. Bronwyn Hall & Jacques Mairesse, 1998. "Firm-Level Investment in France and the United States: An exploration of what we have learned in twenty years," Economics Series Working Papers 1998-W09, University of Oxford, Department of Economics.
    19. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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    21. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    22. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
    23. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
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    25. Nickell, Stephen J, 1977. "The Influence of Uncertainty on Investment," Economic Journal, Royal Economic Society, vol. 87(345), pages 47-70, March.
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