uncertainty investment and industry evolution we study the effects of aggregate and idiosyncratic uncertainty on the entry of firms total investment and prices in a competitive industry with irreversible investment we first use standard dynamic programming methods to determine firms entry decisions and we describe the resulting industry equilibrium and its characteristics emphasizing the effects of different sources of uncertainty we then show how the conditional distribution of prices can be used as an alternative means of determining and understanding the behavior of firms and the resulting industry equilibrium finally we use four digit u s manufacturing data to examine some implications of the model

tax policy uncertainty and corporate investment abstract the anticipatory effects of a corporate tax reform of the tax cut cum base broadening variety are analyzed in a dynamic stochastic adjustment model of firm behavior focusing on the case where the firm is uncertain both about the timing and the contents of the expected reform the value of the firm is solved prior to and after the reform the existence of investment spurts prior to the implementation of the tax reform is established rigorous results are derived under constant returns and the effects of diminishing returns are explained the expectation of a future tax cut causes the firm to accelerate optimal investment while the expectation of a reduction in the tax base the rate of fiscal depreciation has the opposite effect for a firm which updates information timing uncertainty interacts with the expectation effect moreover increased timing uncertainty may accelerate or decelerate investment as an optimal response to an expected tax cut futhermore for reasonable assumptions it is shown that a rate cut cum base broadening tax reform of the type implemented in several oecd countries in the 1980s and 1990s cannot be revenue neutral

product market competition and the impact of price uncertainty on investment some evidence from us manufacturing industries the authors estimate the impact of price uncertainty on investment using a panel of u s manufacturing industries pooling the data for all industries uncertainty has no impact on current investment however for industries that have low levels of seller concentration and thus are likely to be highly competitive the estimated impact is negative and statistically significant while for industries with high levels of seller concentration the impact is always small and not significantly different from zero the finding of a negative relationship between investment and price uncertainty in competitive industries is broadly consistent with models that incorporate irreversibility of capital investment copyright 1996 by blackwell publishing ltd

price discrimination by u s and german exporters the insensitivity of the u s trade balance to the sharp depreciation of the dollar in the past three years has revived interest in the relationship between exchange rates and the trade balance a central issue in most analyses of the relation between the current account and the exchange rate concerns the price adjustment process the simple integrated competitive market model predicts that local currency prices should change in proportion to the nominal exchange rate for a country too small to influence world prices the relationship between local currency import prices and exchange rates has been referred to as the pass through relationship in the empirical literature in international economics if the proportional relationship between import prices and exchange rates holds pass through is said to be complete accounts of recent u s experience cite the failure of dollar prices of imported goods to rise in proportion to exchange rates i e incomplete pass through as an important factor in explaining the persistence of the trade deficit unfortunately observations on pass through alone provide limited insight into the behavior of markets since incomplete pass through is consistent with at least two fundamentally different paradigms one is the standard competitive model of trade in which the law of one price holds but exchange rate fluctuations are associated with large changes in import demand due to other factors for example if dollar appreciation is correlated with increases in world demand and industry marginal cost is increasing then pass through will be less than complete the other is an imperfectly competitive model in which exporters are capable of price discriminating across destination markets a phenomenon paul krugman 1987 has labeled pricing to market in this model incomplete pass through is typically associated with fluctuations in the markup of price over marginal cost on exports 2 these fluctuations in markups are believed to be countryspecific they do not reflect the behavior of prices to other export destinations both models are plausible explanations of recent u s experience unfortunately it is impossible to distinguish between these competing models using only information on import prices and exchange rates for a single country in order to distinguish between the competing models an empirical analysis of goods prices and exchange rates must be capable of measuring either marginal cost or the markup over marginal cost either of these tasks poses formidable empirical problems much of the empirical literature in industrial organization has been concerned with precisely these issues since markups are an important measure of the competitiveness of industries

optimal strategies for capital constrained low carbon supply chains under yield uncertainty abstract we investigate the optimal strategies for a capital constrained low carbon supply chain with uncertain yield with the features of green finance and carbon cap and trade scheme the results indicate that the green finance subsidy and the low carbon subsidy have positive impacts on the carbon emission reduction but the yield uncertainty has negative impacts for manufacturers with low initial emission level the green finance subsidy is more efficient than the low carbon subsidy however for manufacturers with high initial emission level the low carbon subsidy is more effective than the green finance subsidy further analysis indicates that green finance can increase the positive effects of the carbon cap and trade scheme on manufacturers with medium or low emission levels but the yield uncertainty can decrease the positive effects for high emission manufacturers with green finance the cap and trade can have more negative effects on the investment in carbon emission reduction and with the yield uncertainty the cap and trade can have less negative effects on the manufacturers carbon emission reduction

on the ineffectiveness of tax policy in altering long run growth harberger s superneutrality conjecture abstract in 1964 harberger conjectured that although theory predicts that changes in tax rates affect investment and growth in the long run in practice tax policy is an ineffective instrument to influence growth this paper provides theoretical and empirical evidence in favor of this view the growth effects of tax policy in the class of endogenous growth models driven by human capital accumulation are examined and numerical simulations of these models confirm the results harberger predicted cross country panel regressions estimated using a new method for measuring effective tax rates produce significant investment effects from taxes that are consistent with negligible growth effects these results are robust to the introduction of other growth determinants

entry by foreign firms in the united states under exchange rate uncertainty this paper tests the effects that real exchange rate fluctuations had on foreign direct investment into the united states during the 1980s using a sample of foreign investments in sixty one four digit sic u s wholesale industries this paper finds exchange rate volatility to be negatively correlated with the number of foreign investments that occur in these industries this negative effect is most pronounced for industries where sunk investments in physical and intangible assets are relatively high although exchange rate volatility deters investment from all countries its effect was most significant for investments by japanese companies copyright 1993 by mit press

aggregate uncertainty capacity utilization and manufacturing investment theory suggests that the level of uncertainty affects the investment decision for firms although the sigh of the effect is ambiguous a garch m estimator is used to model the conditional variance of gdp as a proxy for uncertainty this measure is then employed in a simple model of the investment decision the results are that the level of aggregate uncertainty has a significant negative effect on manufacturing investment in particular periods there were very large effects on average uncertainty reduces investment by about 5 but in 1974 the effect peacked at 48

investment with uncertain tax policy does random tax policy discourage investment we consider the impact of tax policy uncertainty on firm level and aggregate investment comparing investment behaviour when uncertainty is due to a shock following geometric brownian motion gbm versus when random discrete jumps in tax policy occur expectations of the likelihood of a tax policy switch have an important negative impact on the gain to delaying investment in the latter model and time to investment can fall with increasing tax policy uncertainty aggregate investment simulations indicate that capital formation is adversely affected by increases in uncertainty in the traditional gbm model but can be enhanced in the jump process model

the economic effects of production taxes in a stochastic growth model this paper analyzes the effects of stochastic taxes on production in simple stochastic growth model in so doing the paper explicitly examines the importance of uncertainty on the decisions of individual agents this importance is emphasized by comparing economic outcome to various realizations of tax rates under uncertainty and perfect foresight copyright 1990 by american economic association

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

the macroeconomic effects of distortionary taxation abstract prescott 1986 estimates that technology shocks account for 75 of the fluctuations in the postwar u s economy this paper reestimates the contribution of technological change for a standard business cycle model that includes a public sector and fiscal disturbances i find that a significant fraction of the variance of aggregate consumption investment output capital stock and hours of work can be explained by disturbances in labor and capital tax rates and government consumption i also use the model to quantify the welfare costs of capital and labor taxation for both the time series and welfare calculations maximum likelihood estimates of taste technology and policy parameters are used

large company capital formation and effects of market share turbulence micro data evidence from the pims database the possible effect of demand uncertainty on company investment decisions is investigated at the micro level a standard investment function is employed and modified to incorporate demand uncertainty the data comes from the pims data base on business units of large firms in concentrated markets in dynamic panel data estimation significance was found for a variable representing market share turbulence in a number of industries this variable causes a depressing effect on capital investment either on its own or in combination with indicators of vertical integration which indicate insulation from demand uncertainty the results constitute some of the best available evidence that demand uncertainty constraints capital investment

tax uncertainty and investment a cross country empirical examination i introduction spanning a period of nearly 100 years of economic research a substantial body of literature has developed with the goal of explaining the behavior of investment over time 1 although many of these studies have considered the implications of tax policy for investment in an uncertain world most have also implicitly assumed that the tax policy itself does not contribute to the uncertainty the problem is that tax policy can be very uncertain in many cases 2 and to date we know little about the consequences especially from an empirical standpoint more generally empirical evaluations of uncertainty and investment are very limited compared with the development of theoretical analyses calcagnini and saltari 2000 and the case of tax uncertainty is no exception this article sets out to fill part of the intellectual void by empirically investigating the impact of volatility in effective tax rates on investment in a cross section of countries namely the 15 countries of the european union eu the united states and japan in doing so i first estimate tax rate volatility using an arch specification with data on effective capital tax rates i then provide panel regression results using the system generalized method of moments gmm sys estimator of arellano and bover 1995 see also blundell and bond 1998 which suggest that the volatility of effective tax rates on capital have a significant negative impact on investment per worker in these countries the remainder of the article proceeds as follows section ii briefly reviews the existing literature on tax policy uncertainty and investment as well as existing empirical studies of uncertainty in general and investment section iii develops the empirical model i employ to estimate the relationship between tax volatility and investment section iv then presents an analysis of effective tax rates in the eu countries the united states and japan followed by a discussion of the data and econometric issues in section v and an examination of the effects of tax rate volatility on investment in section vi section vii provides concluding remarks ii theoretical foundations tax policy uncertainty and investment although most of the voluminous literature on tax policy and investment under uncertainty ignores observed randomness in tax policy a recent set of literature has begun to explore these issues in some detail mostly through simulation 3 the basic premise underlying these studies is that because output price uncertainty tends to retard investment pindyck 1988 4 tax uncertainty might be expected to harm investment as well hassett and metcalf 1999 further credence to a negative relationship between tax uncertainty and investment is given by the business community s mantra that they cannot make plans if they don t have confidence in the tax structure bizer and judd 1989 223 these simulation studies however demonstrate that the impact of tax uncertainty depends crucially on the source and nature of the uncertainty contrary perhaps to conventional wisdom in some cases increased uncertainty can be shown to have positive effects on investment growth or welfare bizer and judd 1989 simulate the economic effects of introducing random tax policy in a dynamic general equilibrium model they find that if random tax rates or credits are serially correlated the target capital stock falls when taxes are high and rises when taxes are low their more interesting case considers independently and identically distributed random tax shocks in this case the authors find that randomness in investment tax credits generates large fluctuations in investment which have the effect of reducing both utility and production because both are concave functions as well revenue 5 they find that variance in future tax rates however is not important for long term investments and in fact raises nontrivial mounts of revenue at a welfare cost that is never more than the cost associated with raising an equivalent amount of revenue with a permanent increase in a deterministic tax rate

the econometric analysis of models with risk terms summary in this paper we have attempted to provide an integrated approach to the estimation of models with risk terms it was argued that there exist orthogonality conditions between variables in the information set and higher order moments of the unanticipated variable density these could be exploited to provide consistent estimators of the parameters associated with the risk term specifically it was recommended that an iv estimator should be applied with instruments constructed from the information set four existing methods commonly used to estimate models with risk terms are examined and applications of the techniques are made to the estimation of the risk term in the us c exchange market and the effects of price uncertainty upon production

aggregate uncertainty investment and asymmetric adjustment in the uk manufacturing sector theory suggests that the level of uncertainty facing firms should affect both the rate of adjustment to and the steady state level of investment although there is ambiguity about the sign of the effect a non linear model of investment behaviour incorporating time varying adjustment speeds with threshold effects is estimated for the uk manufacturing sector the most general non linear specification is found to be most congruent with the data uncertainty has a large and significant effect on both levels and rates of adjustment

investment tax incentives and frequent tax reforms despite the frequency of tax changes and their potential importance to investors almost all of the analysis of tax based investment incentives assumes investors never anticipate any tax changes we depart from this approach by analyzing the historical pattern of u s corporate investment incentives over the period 1953 86 incorporating the feature of investor awareness that the tax code may change our analysis incorporates a predictive equation for future tax variables into a model of optimal investment subject to adjustment costs and uncertainty we find that expectations of future tax changes significantly affect the incentive to invest only if adjustment costs are low in this case the incentive to invest in 1986 was strong as investors are estimated to have anticipated the coming reduction in investment incentives this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

rational expectations and tax policy experimental market evidence abstract experimental markets are used to test whether 1 1 subjects forecasts of future and unknown policy conform to the rational expectations hypothesis and 2 2 subjects purchases of commodities are made in anticipation of such policy forecast results confirm previous studies that support adaptive expectations on the other hand subjects exhibited a type of as if rationality by learning to alter their commodity purchases intertemporally in anticipation of fiscal changes this ability was only slightly diminished when policy was stochastic or when the micro economies were in disequilibrium and in chaos

what do we know about investment under uncertainty recent theoretical developments relating to investment under uncertainty have highlighted the importance of irreversibility for the timing of investment expenditures and their expected returns this has subsequently stimulated a growing empirical literature which examines uncertainty and threshold effects on investment behaviour this paper presents a review of this literature a variety of methods have been used to investigate the empirical implication of irreversibility in investment the majority focusing on the relationship between investment flows and proxy measures of uncertainty a general conclusion is that increased uncertainty at both aggregate and disaggregate levels leads to lower investment rates this suggests that there is an irreversibility effect under which greater uncertainty raises the value of the call option to delay a commitment to investment this effect appears to dominate any positive impact on investment arising from the fact that greater uncertability under certain circumstances increases the marginal profitability of capital the methods used raise a number of issues which call into question the reliability of the findings and these are addressed in the paper however if such irreversibility effects are present then their omission from traditional investment models casts doubt on the efficacy of such specifications jel classification d81 d92 e22

taxation and uncertainty while taxes may be certain u s tax policy has certainly not been furthermore intrinsic economic risk makes investment decisions risky therefore a serious examination of the effects of tax policy on dynamic economic behavior should consider both sources of uncertainty this paper presents a simple theoretical and computational model that can analyze both intrinsic risk and uncertain taxation furthermore it will be clear that these techniques will be useful for examining general problems of taxation and risk when studying the impact of past and or proposed tax changes one of two extreme assumptions are usually made either agents are perfectly aware of future tax policy a perfect foresight assumption or they always believe that no change will ever occur a myopic foresight assumption these two assumptions yield substantially different views of recent tax experience as alan auerbach and james hines 1987 demonstrate in a partial equilibrium context both are clearly wrong the myopic specification assumes that individuals believe at each point in time that the current tax law will surely continue forever even after they have been hit repeatedly with tax changes on the other hand it is absurd to think that in say 1977 a significant number of individuals perfectly knew the various tax changes that would occur during the following decade this paper analyzes a dynamic general equilibrium model wherein taxpayers understand the uncertainty in tax policy when making their deci

cross country evidence on the link between volatility and growth this paper presents empirical evidence against the standard dichotomy in macroeconomics that separates growth from the volatility of economic fluctuations in a sample of ninety two countries as well as a sample of oecd countries the authors find that countries with higher volatility have lower growth the addition of standard control variables strengthens the negative relationship the authors also find that government spending induced volatility is negatively associated with growth even after controlling for both time and country fixed effects copyright 1995 by american economic association

the influence of uncertainty on uk manufacturing investment this paper reports the results of including proxies for growth and inflation uncertainty in an accelerator style investment equation set up in error correction form for u k manufacturing plant and machinery expenditure the uncertainty proxies are constructed as cross section dispersion indices of independent economic forecasts the results confirm the importance of output growth uncertainty as a negative determinant of capital formation inflation uncertainty was found to have a short run influence only copyright 1991 by royal economic society

the international ramifications of tax reforms supply side economics in a global economy this paper studies tax reforms in a dynamic model of a global economy calibrated to current u s and european tax policies world capital markets add consumption smoothing and income redistribution effects that alter closed economy predictions in the absence of taxes on foreign interest welfare gains of eliminating u s income taxes are enlarged by up to 34 percent at the expense of european losses caused by transitional declines in consumption and leisure and a permanent capital outflow in contrast if foreign interest is taxed the same tax reform reduces u s welfare 0 7 percent and increases european welfare 1 8 percent copyright 1998 by american economic association