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Investment, Uncertainty, and Irreversibility in Ghana

Author

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  • Ms. Catherine A Pattillo

Abstract

Panel data on Ghanaian manufacturing firms are used to test predictions from models of irreversible investment under uncertainty. Information on the entrepreneur’s subjective probability distribution over future demand for the firm’s products is used to construct the expected variance of demand, which is used as a measure of uncertainty. Empirical results support the prediction that firms wait to invest until the marginal revenue product of capital reaches a firm-specific hurdle level. Moreover, higher uncertainty raises the hurdle level that triggers investment, and uncertainty has a negative effect on investment levels that is greater for firms with more irreversible investment.

Suggested Citation

  • Ms. Catherine A Pattillo, 1997. "Investment, Uncertainty, and Irreversibility in Ghana," IMF Working Papers 1997/169, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1997/169
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    Cited by:

    1. Reinikka, Ritva & Svensson, Jakob, 1999. "How inadequate provision of public infrastructure and services affects private investment," Policy Research Working Paper Series 2262, The World Bank.
    2. Svensson, Jakob, 2000. "Is the bad news principle for real?," Economics Letters, Elsevier, vol. 66(3), pages 327-331, March.
    3. Calcagnini, Giorgio & Saltari, Enrico, 2000. "Real and Financial Uncertainty and Investment Decisions," Journal of Macroeconomics, Elsevier, vol. 22(3), pages 491-514, July.

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