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Uncertainty, instability, and irreversible investment : theory, evidence, and lessons for Africa

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  • Serven, Luis

Abstract

A recent (but rapidly growing) literature has focused on how uncertainty and instability affect the adoption of fixed investment projects. That literature shows that if fixed investment projects are costly or impossible to reverse, uncertainty can become a powerful deterrent to investment. The author reviews the literature on irreversible investment to identify the implications for macroeconomic policy and to gauge the practical importance, especially for sub-Saharan Africa, of the link between uncertainty and investment. He presents empirical evidence on the negative association between investment performance and measures of instability, using cross-section time-series data. That evidence suggests that instability and uncertainty are important factors in Africa's poor investment record over the last two decades.

Suggested Citation

  • Serven, Luis, 1997. "Uncertainty, instability, and irreversible investment : theory, evidence, and lessons for Africa," Policy Research Working Paper Series 1722, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1722
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    References listed on IDEAS

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    Cited by:

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    2. Aysan, Ahmet Faruk & Nabli, Mustapha Kamel & Veganzones-Varoudakis, Marie-Ange, 2006. "Governance and private investment in the Middle East and North Africa," Policy Research Working Paper Series 3934, The World Bank.
    3. Marie-Ange Véganzonès-Varoudakis & A. Aysan, 2007. "How Do Political and Governance Institutions Affect Private Investment Decisions? An Application to the Middle East and North Africa," Post-Print hal-00229728, HAL.
    4. Gill, Indermit & Pinto, Brian, 2005. "Public debt in developing countries : has the market-based model worked?," Policy Research Working Paper Series 3674, The World Bank.
    5. Chen,Derek Hung Chiat & Ranaweera,Thilakaratna & Storozhuk, Andriy, 2004. "The RMSM-S+P : a minimal poverty module for the RMSM-X," Policy Research Working Paper Series 3304, The World Bank.
    6. Robert Lensink, 2002. "Is the uncertainty-investment link non-linear? Empirical evidence for developed economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 138(1), pages 131-147, March.
    7. Toan Quoc Nguyen & Ms. Rina Bhattacharya & Mr. Benedict J. Clements, 2003. "External Debt, Public Investment, and Growth in Low-Income Countries," IMF Working Papers 2003/249, International Monetary Fund.
    8. Nishide, Katsumasa & Yagi, Kyoko, 2016. "Investment under regime uncertainty: Impact of competition and preemption," International Journal of Industrial Organization, Elsevier, vol. 45(C), pages 47-58.

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