cost uncertainty and the rate of investment abstract this paper examines the effect of cost and price uncertainty on the optimal rate of investment by firms within a general equilibrium framework former works which have studied this issue like hartman 1972 and abel 1983 1984 1985 have come to the conclusion that this effect is positive since increased price uncertainty raises expected profitability but these studies assume a fixed discount rate which is equivalent to assuming that consumers are risk neutral this paper shows that if consumers are risk averse the effect of uncertainty may be reversed and investment may be depressed when price or cost uncertainty is increased

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

regret and feedback information in first price sealed bid auctions we investigate the effect of regret related feedback information on bidding behavior in sealed bid first price auctions two types of regret are possible in this auction format a winner of the auction may regret paying too much relative to the second highest bid and a loser may regret missing an opportunity to win at a favorable price in theory under very general conditions being sensitive to winning and paying too much should result in lower average bids and being sensitive to missing opportunities to win at a favorable price should result in higher bids for example the u s government s policy of revealing losing bids may cause regret sensitive bidders to anticipate regret and bid conservatively decreasing the government s revenue we test these predictions in the laboratory and find strong support for both

asymmetric effects of oil price uncertainty on corporate investment abstract using a comprehensive data set of a large panel of us firms over 1984 2017 we show that the negative effect of crude oil price return uncertainty on investments is asymmetric in particular we show that investment is more significantly reduced following the volatility of positive oil price changes than that of negative changes and this asymmetric effect is more pronounced in small firms in addition we find that the asymmetric effect is stronger in the crude oil and gas producing companies where the effect of the volatility of negative oil price changes is greater than that of positive oil price changes we also find that the impact of positive or negative oil price change uncertainty on investments substantially differs across different industries the results are quite robust to the way in which we measure the investment and oil price uncertainty and to alternative regression methods

exchange rate volatility and foreign trade evidence from thirteen ldc s this article investigates empirically the impact of real exchange rate volatility on the export flows of 13 less developed countries ldc s over the quarterly period 1973 1996 estimates of the cointegrating relations are obtained using johansen s multivariate procedure estimates of the short run dynamics are obtained for each country using the error correction technique the major results show that increases in the volatility of the real effective exchange rate approximating exchange rate uncertainty exert a significant negative effect on export demand in both the short run and the long run in each of the 13 ldc s these effects may result in significant reallocation of resources by market participants

how not to sell nuclear weapons we consider situations where a sale affects the ensuing interaction between potential buyers these situations are modeled by assuming that an agent who does not acquire the object for sale incurs an identity dependent externality we construct a revenue maximizing auction for the seller we observe that 1 outside options and participation constraints are endogenous 2 the seller extracts surplus also from agents who do not obtain the auctioned object 3 the seller is better off by not selling at all while obtaining some payments if externalities are much larger than valuations

real effective exchange rate volatility and growth a framework to measure advantages of flexibility vs costs of volatility abstract by devising a real effective exchange rate reer index where bilateral exchange rates are weighted for relative trade shares we find that the reer volatility differently from the bilateral exchange rate volatility with the dollar has significant impact on growth of per capita income after controlling for other variables traditionally considered in conditional convergence estimates we also find that this cost of volatility effect can be reconciled with the concurring negative and significant effect on growth of the adoption of a fixed exchange rate regime advantage of flexibility effect where the latter may be also interpreted as the cost of choosing pegged regimes without harmonization of rules and macroeconomic policies with main trading partners the adoption of an reer volatility measure instead of a bilateral exchange rate with the dollar has the advantage of making it possible a joint test for these two effects this is because while fixed exchange rate regimes are strongly negatively correlated and almost collinear with bilateral exchange rate volatility with the dollar the correlation is much weaker when considering our reer volatility measure

does feedback really matter in one shot first price auctions does the type of posterior feedback affect how people decide in one shot environments we revisit this question in first price auction markets we consider three feedback types minimal only knowing whether winning or not loser also knowing the winning bid and winner knowing the second highest bid if winning filiz ozbay and ozbay 2007 find that loser as opposed to minimal or winner feedback increases bids we use three novel protocols and additionally replicate theirs using a sample of 624 subjects we find that bidders ex ante knowledge of posterior feedback type has no systematic effect on the average bid value ratios

permanent and transitory oil volatility and aggregate investment in malaysia abstract this paper investigates the relation between aggregate investment and oil volatility and its permanent and transitory components for a developing country malaysia in the paper the components generalized autoregressive conditional heteroskedasticity cgarch model is utilized to decompose conditional oil volatility into permanent oil volatility and transitory oil volatility respectively reflecting fundamental driven and random shifts in oil volatility they are expected to exert differential effects on aggregate investment adopting a vector autoregression var framework to allow feedback effects between aggregate investment and its determinants the paper documents evidence supporting the adverse effects of conditional oil volatility permanent oil volatility and transitory oil volatility on aggregate investment and real output interestingly contrary to the findings for the developed markets us and oecd the real effects of permanent oil volatility tend to be stronger these findings are reasonably robust to variable specification and measurements in the var system hence there is an indication that heightened oil volatility accounts for the slumps in malaysia s aggregate investment after the asian financial crisis

paying not to go to the gym how do consumers choose from a menu of contracts we analyze a novel dataset from three u s health clubs with information on both the contractual choice and the day to day attendance decisions of 7 752 members over three years the observed consumer behavior is difficult to reconcile with standard preferences and beliefs first members who choose a contract with a flat monthly fee of over 70 attend on average 4 3 times per month they pay a price per expected visit of more than 17 even though they could pay 10 per visit using a 10 visit pass on average these users forgo savings of 600 during their membership second consumers who choose a monthly contract are 17 percent more likely to stay enrolled beyond one year than users committing for a year this is surprising because monthly members pay higher fees for the option to cancel each month we also document cancellation delays and attendance expectations among other findings leading explanations for our findings are overconfidence about future self control or about future efficiency overconfident agents overestimate attendance as well as the cancellation probability of automatically renewed contracts our results suggest that making inferences from observed contract choice under the rational expectation hypothesis can lead to biases in the estimation of consumer preferences

information disclosure in auctions an experiment we report experimental results on the importance of information disclosure policy in first price sealed bid auctions interaction takes place in 10 periods according to a random matching protocol and we control the level of information feedback bidders receive after each period when bidders are informed about the losing bids in previous periods prices are higher than the theoretical prediction however when this information is not revealed the bidding becomes more competitive and the bids come close to the theoretical prediction we suggest that a signaling phenomenon may be important for explaining these results 2002 elsevier science b v all rights reserved

independent private value auctions bidder behaviour in first second and third price auctions with varying numbers of bidders the symmetric equilibrium of third price auctions is characterized it makes a number of contrasting predictions relative to firms and second price auctions bids exceed private values the marginal effects on bids of an increase in private values is greater than one increasing numbers of bidders reduces bids and risk aversion requires bidding below the risk neutral nash equilibrium in the experiment bidders do not always satisfy the point predictions of the theory however the game theoretic models correctly anticipate at least directionally the important effects of the price rule changes copyright 1993 by royal economic society

central bank transparency and the volatility of exchange rates abstract we analyze the effect of monetary policy transparency on bilateral exchange rate volatility we test the theoretical predictions of a stylized model using panel data for 62 currencies from 1998 to 2010 we find strong evidence that an increase in the availability of information about monetary policy objectives decreases exchange rate volatility using interaction models we find that this effect is more pronounced for countries with a lower flexibility of goods prices a lower level of central bank conservatism and a higher interest rate sensitivity of money demand

disappointment in decision making under uncertainty decision analysis requires that two equally desirable consequences should have the same utility and vice versa most analyses of financial decision making presume that two consequences with the same dollar outcome will be equally preferred however winning the top prize of 10 000 in a lottery may leave one much happier than receiving 10 000 as the lowest prize in a lottery this paper explores the implications of disappointment a psychological reaction caused by comparing the actual outcome of a lottery to one s prior expectations for decision making under uncertainty explicit recognition that decision makers may be paying a premium to avoid potential disappointment provides an interpretation for some known behavioral paradoxes and suggests that decision makers may be sensitive to the manner in which a lottery is resolved the concept of disappointment is integrated into utility theory in a prescriptive model

panel data evidence of the impact of exchange rate uncertainty on private investment in south east asia this article examines the impact of real exchange rate uncertainty on the private investment in south east asia using panel data from four countries of the region namely indonesia malaysia the philippines and thailand annual time series data from 1972 to 2001 is used before carrying out the estimation the time series properties of the data are diagnosed and an error correction model is developed and estimated the model is estimated using both the fixed effects and the random effects estimators the estimated results from both the estimations suggest that the real exchange rate uncertainty had a negative effect on the private investment in that region

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

an endowment effect for risk experimental tests of stochastic reference points recent models of reference dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies a subset of such expectations based models predicts an endowment effect for risk that risk attitudes differ when reference points change from certain to stochastic in two purposefully simple risk preference experiments eliminating often discussed confounds i demonstrate both between and within subjects such an endowment effect for risk these results provide needed separation between expectations based reference dependent models allow for evaluation of recent theoretical extensions and may help to close a long standing debate in decision science on inconsistency between utility elicitation methodologies

sudden stops banking crises and investment collapses in emerging markets abstract we evaluate whether financial openness leaves emerging market economies vulnerable to the adverse effects of capital reversals sudden stops on domestic investment we investigate this claim in a broad sample of emerging markets during the period 1976 2002 if the banking sector does not experience a systemic crisis sudden stop events fail to have a significant impact on investment bank crises on the other hand have a significant negative effect on investment even in the absence of a contemporaneous sudden stop crisis we also find that openness to capital flows worsens the adverse impact of banking crises on investment our results provide statistical support for the policy view that a strong banking sector which can withstand the negative fallout of capital flight is essential for countries that open their economies to international financial flows

expectations as endowments evidence on reference dependent preferences from exchange and valuation experiments while evidence suggests that people evaluate outcomes with respect to reference points little is known about what determines them we conduct two experiments that show that reference points are determined at least in part by expectations in an exchange experiment we endow subjects with an item and randomize the probability they will be allowed to trade subjects that are less likely to be able to trade are more likely to choose to keep their item in a valuation experiment we randomly assign subjects a high or low probability of obtaining an item and elicit their willingness to accept for it the high probability treatment increases valuation of the item by 20 30 copyright 2011 oxford university press

consumer rationality and the status quo received microeconomic theory presumes rational consumers maximize utility over all commodity bundles recent analysis however suggests that a consumer s status quo may limit economic rationality bias consumer decisions and induce serious errors in survey based valuations of public and private goods using regression and choice theoretic frameworks we investigate the existence of status quo effects in the consumer valuation of a particular unpriced product the reliability of residential electrical service such valuations have become important in electric utility resource planning and rate making we find substantial status quo effects which must be addressed in welfare comparisons regarding electric service reliability

the effect of regret on optimal bidding in auctions while most models of auctions and competitive bidding assume that each bidder s utility for an outcome depends only on his own profit we allow the utility to also depend on any regret that a bidder suffers after the fact and characterize when and how this affects bidding specifically a winner might regret money left on the table in federal offshore oil lease sales while a loser might regret seeing an object sell for less than his own value for it we show that for risk neutral bidders who after the fact know the winner s price for the object a bidder s optimal bidding strategy will not depend on the relative weight given to profit versus regret if both forms of regret weigh equally heavily however if bidders weight money left on the table regret more heavily then the bid taker suffers likewise if losers do not learn the winner s price then the bid taker also suffers thus the existing models exclusion of regret from risk neutral bidders utility functions affects the applicability of the

physician payments under health care reform abstract this study examines the impact of major health insurance reform on payments made in the health care sector we study the prices of services paid to physicians in the privately insured market during the massachusetts health care reform the reform increased the number of insured individuals as well as introduced an online marketplace where insurers compete we estimate that over the reform period physician payments increased at least 11 percentage points relative to control areas payment increases began around the time legislation passed the house and senate the period in which their was a high probability of the bill eventually becoming law this result is consistent with fixed duration payment contracts being negotiated in anticipation of future demand and competition

5 information impact and allocation rules in auctions with affiliated private values a laboratory study in affiliated private value auctions each bidder has perfect information regarding his her own value for the object at auction but higher values of the item for one bidder make higher values for other bidders more likely we report on a series of experiments examining three key implications of these auctions i in a first price auction public information about rivals values increases expected revenue ii an english auction increases expected revenue compared to a first price auction and iii a second price auction is isomorphic to an english auction in examining these issues we compare predictions of some ad hoc bidding models with nash equilibrium predictions in the first price auction experiments nash equilibrium bidding theory organizes the data better than either of two ad hoc bidding models public information about others valuations does increase average revenue but the increase in revenue is smaller and less reliable than predicted under risk neutral nash equilibrium bidding lower average revenue might be attributed to risk aversion while the high variability is attributed to a sizable frequency of individual bidding errors relative to the theory bidding theory precisely organizes english auction outcomes after a brief initial learning period the dominant strategy equilibrium does not organize second price auctions nearly as well as market prices persistently exceed predicted prices the difference between english and second price outcomes is attributed to effects of different information flows inherent in the structure of the two institutions on eliminating bidding errors revenue impacts of these two institutions relative to a first price auction are examined in light of observed bidding patterns

on the investment uncertainty relationship in a real options model abstract it appears to be widely accepted in the real options literature that an increase in uncertainty should have an inhibiting effect on investment our article demonstrates that the notion of a negative uncertainty investment relationship is not always correct we show that in certain situations an increase in uncertainty can actually increase the probability of investing and thereby have a positive impact on investment

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

reference dependent subjective expected utility abstract a reference dependent generalisation of subjective expected utility theory is presented in this theory preferences between acts depend both on final outcomes and on reference points which may be uncertain acts it is characterised by a set of axioms in a savage style framework a restricted form of the theory separates attitudes to end states encoded in a satisfaction function from attitudes to gains and losses of satisfaction given weak additional assumptions the restricted theory excludes cycles of choice explains observed disparities between willingness to pay and willingness to accept valuations of lotteries and predicts preference reversal

credence goods costly diagnosis and subjective evaluation we study contracting between a consumer and an expert the expert can invest in diagnosis to obtain a noisy signal about whether a low cost service is sufficient or whether a high cost treatment is required to solve the consumer s problem this involves moral hazard because diagnosis effort and signals are not observable treatments are contractible but success or failure of the low cost treatment is observed only by the consumer payments can therefore not depend on the objective outcome but only the consumer s report or subjective evaluation a failure of the low cost treatment delays the solution of the consumer s problem by the high cost treatment to a second period we show that the first best solution can always be implemented if the parties discount rate is zero an increase in the discount rate reduces the range of parameter combinations for which the first best can be obtained in an extension we show that the first best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents

terms of trade shocks and optimal investment another look at the laursen metzler effect conventional analyses of the effect of terms of trade shocks provide a misleading view of their impact on investment and the current account because capital goods imports are excluded from the analytical framework the author argues that such an exclusion is both arbitrary and unrealistic the author reexamines the consequences of permanent and transitory changes in terms of trade in a rational expectations model of a small open economy with intertemporally optimizing agents and with trade in both consumption and capital goods in this framework the responses to a permanent terms of trade improvement in unambiguous the long run capital stock and thus investment must rise and the current account must deteriorate exactly the opposite of the laursen metzler effect a transitory improvement in the terms of trade raises saving but has an uncertain effect on investment so the impact on the current account is generally ambiguous and is shown to depend on three factors the import contents on consumption and investment the duration of the windfall and the degree of intertemporal substitutability in both consumption and investment

understanding bilateral exchange rate risks abstract we apply the autoregressive conditional jump intensity arji model to weekly bilateral exchange rate returns of 31 countries and examine the determinants of bilateral exchange rate risks over the period 2001 2013 consistent with the balance sheet effects in the open economy literature we find that bilateral exchange rate risks are significantly reduced by external financial liabilities above and beyond the standard optimal currency area oca factors and the development of domestic financial sectors will attenuate this effect subsample analysis reveals that developed countries also face credit constraints in the global capital market and the negative effects of external liabilities on bilateral exchange rate risks are increasingly pronounced in countries facing more credit constraints

information feedback in first price auctions i apply the notion of a self confirming equilibrium sce to study how feedback in first price auctions influences bidders perceptions about their strategic environment and consequently their bidding behavior in a private values setting revealing the two highest bids at the end of each auction is sufficient for bidders to have correct beliefs justifying the assumption of nash equilibrium in contrast in every symmetric sce of a symmetric affiliated private values model bidding strategies and revenue are weakly higher if only the highest bid is revealed i also consider interdependent valuations and discuss implications for the empirical auction literature

price formation in single call markets this paper reports a laboratory experiment designed to examine the price formation process in a simple market institution the single call market the experiment features random values and costs each period so each period generates a new price formation observation other design features are intended to enhance the predictive power of the bayesian nash equilibrium bne theory developed recently for this trading institution we find that the data support several qualitative implications of the bne but that subjects bid and ask behavior is not as responsive to changes in the pricing rule as the bne predictions bids and asks tend to reveal more of the underlying values and costs than predicted particularly when subjects are experienced nevertheless observed trading efficiency falls below the bne prediction the results offer more support for the bne when subjects compete against nash robot opponents a simple learning model accounts for several of the deviations from bne

portfolio choice and trading in a large 401 k plan we study nearly 7 000 retirement accounts during the april 1994 august 1998 period several interesting patterns emerge most asset allocations are extreme either 100 percent or zero percent in equities and there is inertia in asset allocations equity allocations are higher for males married investors and for investors with higher earnings and more seniority on the job equity allocations are lower for older investors there is very limited portfolio reshuffling in sharp contrast to discount brokerage accounts daily changes in equity allocations correlate only weakly with same day equity returns and do not correlate with future equity returns

a century of economic growth in latin america abstract this paper makes a contribution to the study of economic growth in developing countries by analyzing the six largest latin american economies over 105 years within a two equation framework confirming previous findings physical and human capital prove to be key determinants of gdp per head growth however a more controversial result is an overall negative conditional correlation between trade openness and gdp per head growth though openness has a positive link via investment the evidence also shows that macroeconomic instability has been a drag on long term growth in the region

disappointment and dynamic consistency in choice under uncertainty the central proposition of disappointment theory is that an individual forms expectations about uncertain prospects and that if the actual consequence turns out to be worse than or better than that expectation the individual experiences a sensation of disappointment or elation generating a decrement or increment of utility which modifies the basic utility derived from the consequence by incorporating a simple disappointment elation function into a model of individual choice many observed violations of conventional expected utility axioms including violations of savage s sure thing principle and the isolation effect can be predicted and defended as rational and dynamically consistent behaviour

information and conspiracy in sealed bid auctions abstract this paper examines the allocative properties of the sealed bid institution when different aspects of the available information to bidders are considered specifically we examine a the effect on price determination in repeated sealed bid auctions of post auction revelation of losing bids and b the effect on price determination when conspiratorial discussions are allowed

the role of relative price volatility in the efficiency of investment allocation abstract this paper estimates the impact of relative price volatility on sector level investment allocation using a panel of 65 countries with data for 26 manufacturing industries over the period 1985 2003 results indicate that volatility distorts efficient investment allocation in that investment is not necessarily devoted to relatively more productive sectors especially in emerging market economies that are highly exposed and may lack the necessary institutions to deal with it successfully this is evidence in support of theories suggesting that relative price volatility provides incentives for entrepreneurs to adopt more malleable but less productive production technologies enabling them to accommodate more easily abrupt and frequent changes in relative prices but at the cost of using less productive technologies

theory and misbehavior of first price auctions comment glenn harrison s recent 1989 article in this review has provoked the loudest debate yet heard among experimental economists his critique of the james cox vernon smith and james walker 1983a b 1985a b 1988 henceforth csw laboratory studies of first price sealed bid auctions with independent and private values in my view raises a fundamental methodological issue that is well worth debating and the csw research program deserves further discussion in this short comment i confine myself to what i see as the most important issues and do not try to address all evidence relevant to the ongoing debate first i summarize harrison s central argument very briefly after pointing out two shortcomings in harrison s specific analysis of csw i propose a methodological reconciliation finally and with some trepidation since my own experience with the auction data is relatively slight i suggest an alternative approach to understanding the anomalies discovered by csw

the impact of exchange rate uncertainty on the level of investment conventional wisdom has it that increasing price or exchange rate uncertainty will depress investment using the dixit pindyck model we find that there are situations where this will happen and situations where it does not there are threshold effects which allows us to identify when rising volatility would increase or decrease investment and also to identify which types of industries would gain and which would suffer from a move to fixed exchange rates this is important for monetary union in europe since it is likely that even if trade is insensitive to exchange rate volatility investment with its longer horizon will be affected textbook theories of investment under uncertainty present a rather oversimplified rule for a firm deciding whether to invest or not if the project s expected net present value npv is positive the firm invests otherwise it does not this implies that if the investment is reversible the firm will simply disinvest if the npv turns negative but if investment is irreversible then if a firm decides not to invest it will never invest this is not a realistic approach given uncertainty firms often find it convenient to wait rather than to commit themselves one way or another waiting is therefore a proper alternative to investing or not investing and firms will be confronted with an invest wait do not invest decision rather than an invest do not invest one dixit and pindyck 1994 have developed a model in which the option value of an investment project is evaluated to represent the value of waiting that option value then becomes part of the investment costs because once an irreversible investment is made the possibility of exercising this option to invest later on when better information is available has been lost thus the decision rule is still invest if npv 0 otherwise do not invest but the npv now represents the present value of the expected revenues less the value of the option to invest later less the present value of any other investment costs in this paper we extend the dixit pindyck model for varying degrees of uncertainty and price drift and specifically for the case where that uncertainty is caused by exchange rate volatility such an extension is important not only because it is a new development but also because we need to understand how monetary union will affect investment expenditures in europe for simplicity we assume the domestic prices are fixed and that the only uncertainty is in the exchange rate and hence the domestic value of foreign currency revenues that leaves us with various problems the first is to determine the threshold at which exchange rate price uncertainty is sufficient to affect investment adversely second under what conditions does that uncertainty actually reduce investment third do exchange rate misalignments or exchange rate volatility damage investment more we show that answers to such questions can be c55

auctions with anticipated regret theory and experiment this paper demonstrates theoretically and experimentally that in first price auctions overbidding with respect to the risk neutral nash equilibrium might be driven from anticipated loser regret felt when bidders lose at an affordable price different information structures are created to elicit regret bidders know they will learn the winning bid if they lose loser regret condition or the second highest bid if they win winner regret condition or they will receive no feedback regarding the other bids bidders in loser regret condition anticipated regret and significantly overbid however bidders in the winner regret condition did not anticipate regret jel d44

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

on the sign of the investment uncertainty relationship understanding the effects of uncertainty over any decision variable has fascinated economists for a long time risk aversion and incomplete markets are likely to make the investment uncertainty relationship negative e g roger craine 1989 joseph zeira 1989 what happens in the absence of risk aversion and incomplete markets is however ambiguous richard hartman 1972 and andrew b abel 1983 1984 1985 found that in the presence of symmetric convex costs of adjustment mean preserving increases in price uncertainty raise investment of a competitive firm as long as the profit function is convex in prices on the other hand the recent literature on irreversible investment e g robert s pindyck 1988 giuseppe bertola 1988 has shown that increases in uncertainty lower investment all these results have been derived under either risk neutrality or complete markets intuition suggests that the explanation for such a difference lies with the asymmetric nature of adjustment costs in the irreversible investment case as compared with the symmetry of the adjustment cost mechanisms proposed by abel and hartman although this intuition is confirmed in this paper asymmetric adjustment costs are shown not to be sufficient to explain why the results differ in fact a more hidden but at least as important difference between these two literatures is that the former assumes perfect competition and constant returns to scale whereas the latter assumes either imperfect competition or decreasing returns to scale or both 2 the purpose of this paper is to highlight the role of the decreasing marginal return to capital assumption due to either imperfect competition or decreasing returns to scale or both in determining the effects of adjustment cost asymmetries on the sign of the response of investment to changes in uncertainty under risk neutrality for this the paper develops a simple model with a cost of adjustment mechanism general enough to consider both symmetric convexity and irreversibility as special cases one of the most important findings is the lack of robustness of the negative relationship between investment and uncertainty under asymmetric adjustment costs3 to changes in the degree of competition in fact when firms are nearly competitive the conclusion of hartman and of abel holds no matter how asymmetric adjustment costs are studying adjustment cost mechanisms has a central role in understanding the dynamics of investment and its business cycle implications but conclusive results about the sign of the instantaneous relationship between uncertainty and investment should not be department of economics columbia university new york ny 10027 i am grateful to giuseppe bertola prajit dutta glen hubbard anil kashyap richard lyons and the referees for their useful comments 1the financial literature on investment has considered risk aversion through a premium in the discount rate determined by the capm capital asset pricing model intertemporal capm or consumption capm however often this discount rate is left unchanged when studying the response of investment to uncertainty changes e g pindyck 1988 pp 974 5 thereby omitting the effect of changes in uncertainty on investment due to risk aversion and incomplete markets 2in the typical version of the irreversible investment problem there is no cost of upward adjustments thus imperfect competition and or decreasing returns to scale are required to bound the size of the firm 3in this paper asymmetric adjustment cost refers to the case in which it is more expensive to adjust downward than upward certainly the opposite case is a trivial extension of the case studied in this paper

exchange rate uncertainty and the level of investment in selected south east asian countries the effect of real exchange rate uncertainty on aggregate private investment in indonesia malaysia the philippines and thailand is examined using time series data from 1972 2000 since the use of non stationary time series data may produce spurious results the data series are tested for stationarity using the augmented dickey fuller and phillips perron tests after establishing the stationarity of the data series cointegration tests are performed the cointegration test results reject the hypothesis of no cointegration therefore an error correction model is developed and estimated the estimated results point to an inconclusive empirical relationship between real exchange rate volatility and aggregate private investment

the impact of output and exchange rate volatility on fixed private investment evidence from selected g7 countries this study examines the impact of shocks to exchange rate and output uncertainty volatility on real private fixed investment fi in canada germany the united kingdom and the united states the analysis is conducted using vector autoregressive models that contain the price level real output the volatility of real output the real exchange rate the volatility of the real exchange rate an interest rate and fi the results yield important public policy implications with regard to the impact of output volatility of fi our analysis indicates that volatility shocks measured as output volatility or exchange rate volatility do not have a significant impact on fi for any country in our study

exchange rates and investment in united states industry the path of the dollar has significantly influenced investment activity in u s industry the effects of both exchange rate levels and exchange rate volatility have been more pronounced in the 1980s than in the 1970s although aggregate investment data mask some of these relationships the effects of exchange rates on investment are most pronounced in the disaggregate data for manufacturing durable goods sectors and nonmanufacturing sectors these relationships also have changed over time in contrast to the conventional wisdom in the 1980s real dollar depreciations appreciations were likely to be associated with investment contractions expansions copyright 1993 by mit press

the rich domain of uncertainty source functions and their experimental implementation we often deal with uncertain events for which no probabilities are known several normative models have been proposed descriptive studies have usually been qualitative or they estimated ambiguity aversion through one single number this paper introduces the source method a tractable method for quantitatively analyzing uncertainty empirically the theoretical key is the distinction between different sources of uncertainty within which subjective choice based probabilities can still be defined source functions convert those subjective probabilities into willingness to bet we apply our method in an experiment where we do not commit to particular ambiguity attitudes but let the data speak

macroeconomic stability investment and growth in developing countries abstract it is widely hypothesised that sound macroeconomic policies promote growth by providing a more secure environment for private sector investment decisions this proposition is tested for a cross section of developing countries over the period 1980 1990 using a variety of measures of the quality of macroeconomic management the evidence suggests that good macroeconomic management is associated with faster growth for a given rate of investment it is less clear that the volume of investment is significantly affected there is little evidence of non linearities the results are robust to an extension of the data period back to 1972

does uncertainty cause inertia in decision making an experimental study of the role of regret aversion and indecisiveness previous research has shown that individual decision making is often characterized by inertia that is a tendency for decision makers to choose options that maintain the status quo in this study i conduct a laboratory experiment to investigate two potential determinants of inertia in uncertain environments i regret aversion and ii ambiguity driven indecisiveness i use a between subjects design with varying conditions to identify the effects of these two mechanisms on choice behavior in each condition participants choose between two simple real gambles one of which is the status quo option the findings indicate that regret aversion and ambiguity driven indecisiveness are equally important determinants of inertia which in turn plays a major role in individual decision making

the impact of exchange rate volatility on plant level investment evidence from colombia abstract we estimate the impact of exchange rate volatility on firms investment decisions in a developing country setting employing plant level panel data from the colombian manufacturing census we estimate a dynamic investment equation using the system gmm estimator developed by arellano and bover 1995 and blundell and bond 1998 we find a robust negative impact of exchange rate volatility constructed either using a garch model or a simple standard deviation measure on plant investment consistent with theory we also document that the negative effect is mitigated for establishments with higher mark up or exports and exacerbated for lower mark up plants with larger volume of imported intermediates

theory and misbehavior in first price auctions comment in his recent paper in this review glenn harrison 1989 argues that the conclusions of james cox et al 1982 1983 1985 1988 in their studies of first price private value auctions are not well supported because of shortcomings in the way their experimental investigations were designed analyzed and reported harrison argues that the expected cost of deviations from risk neutral nash equilibrium rnne bidding in these auctions was quite small less than 0 05 at the median so that in terms of expected monetary payoffs payoff space many subjects had little to lose from deviating from the rnne strategy harrison suggests that the significance of the differences cox vernon smith and james walker hereafter csw report between subjects bids and the rnne bids deviations in the message space may therefore need to be reexamined in discussing harrison versus csw we have three primary points to make first in arguing that it is more natural to evaluate subject behavior in expected payoff space harrison 1989 p 749 we think harrison has overstated his case however we agree with his more important point that looking at the cost of deviations is a useful diagnostic tool for determining when experimenters are likely to have lost control over subjects incentives further as we will show in section i this part of harrison s critique applies with special force to csw s studies of bidding second a broader examination of the results of private value auction experiments indicates that risk aversion cannot be the only factor and may well not be the most important factor behind bidding above the rnne found so often in first price privatevalue auctions the most telling evidence here is bidding above the dominant bid price found in second price auctions kagel et al 1987 kagel and levin 1990 and the risk loving found under several treatment conditions in csw s 1984 own multipleunit discriminative auctions auctions in which the high bidders pay their bid price these and other data inconsistent with risk averse bidding are largely ignored in csw 1988 but are nevertheless relevant to the substantive issue of risk aversion in private value auctions they are discussed in section ii third there are data gathered in other investigations which provide strong support for the view that the deviations from rnne bidding reported in first price auctions are not the results of the low expected cost of such deviations however these data unlike the higher stakes payoff data that csw offer in response to harrison are not consistent with csw s subsidiary conclusions that the data can be well accounted for by a narrow class of risk aversion parameters for the bidders together with the assumption that all agents are playing a nash equilibrium of the resulting game of incomplete information a key difference between these experiments and csw s is that if subjects do not respond to csw s treatment condition increasing the payoffs from experimental to u s dollars their behavior will be consistent with csw s theory in contrast department of economics university of pittsburgh pittsburgh pa 15260 we thank jack ochs and emilie roth for thoughtful discussions on earlier drafts of the paper jim cox and glenn harrison for helpful comments on the initial draft of the paper susan garvin for research assistance and ray battalio carl kogut and don meyer for providing us with access to their data research support was provided by the information science and technology and economics divisions of the national science foundation the alfred p sloan foundation and the russell sage foundation the usual caveat applies with special force iwe do not respond to specific comments that csw 1992 make in response to our comment as in order to avoid indefinite regress the ground rules for this debate required us to comment on csw s criticism of harrison after which they would be given the opportunity to respond to our comment

real exchange rate uncertainty private investment in ldcs this paper examines empirically the link between real exchange rate uncertainty and private investment in developing countries using a large cross country time series data set the paper builds a garch based measure of real exchange rate volatility and finds that it has a strong negative effect on investment after controlling for other standard investment determinants and taking into account their potential endogeneity the effect of uncertainty is not uniform however there is some evidence of threshold effects so that uncertainty only matters when it exceeds some critical level in addition the negative effect of real exchange rate uncertainty on investment is significantly larger in economies that are highly open and in those with less developed financial systems

a panel project on purchasing power parity mean reversion within and between countries abstract previous time series studies have shown evidence of mean reversion in real exchange rates deviations from purchasing power parity ppp appear to have half lives of approximately four years however the long samples required for statistical significance are unavailable for most currencies and are potentially inappropriate because of regime changes in this study we re examine deviations from ppp using a panel of 150 countries and 45 annual post wwii observations our panel shows strong evidence of mean reversion that is similar to that from long time series ppp deviations are eroded at a rate of approximately 15 annually i e their half life is around four years such findings can be masked in time series data but are relatively easy to find in cross sections

design choices in privatized social security systems learning from the swedish experience in the 2000 u s presidential campaign george w bush advocated a partial privatization of the social security system according to his plan a portion of the payroll tax would be designated for individual savings accounts at the same time as this issue was being debated in the united states sweden was in the process of launching a system that is very similar to president bush s proposal although bush s plan did not get much attention in the early years of his administration the proposal may resurface either in the united states or in other countries if so important lessons can be learned from the swedish experience in particular the swedish plan adopted an interesting mix of design choices that can now be evaluated based on three years of post implementation experience although there is a large literature in economics on the design of social security systems most of that literature is concerned with macroeconomic considerations such as funding in contrast there has been much less attention devoted to the details of how plans might be designed in part because these details do not seem important from a standard economic perspective in this paper we reverse this usual pattern and focus our attention on the design aspects of the swedish plan we find that although most of the design choices are those that might be approved by most economists in some cases these choices produced undesirable consequences

impulse balance equilibrium and feedback in first price auctions abstract experimental sealed bid first price auctions with private values in which feedback on the losing bids is provided yield lower revenues than auctions where this feedback is not given the concept of weighted impulse balance equilibrium which is based on a principle of ex post rationality and incorporates a concern for social comparison captures the data

economic liberalization and price response of aggregate private investment time series evidence from india this paper presents evidence on the effects of economic liberalization of 1991 on the price responsiveness of aggregate private investment in india the wide ranging reforms are expected to increase the price response of private investment due to i the le chatelier effect ii a higher price elasticity of demand for final goods and iii possible relaxation of the credit constraint the empirical results based on alternative specifications estimation methods and sample periods show a dramatic increase in the price response the elasticity of investment with respect to the relative cost of capital has increased five times after the dismantling of the licence raj ce texte examine les effets de la liberalisation de 1991 sur la reponse des prix de l investissement prive agrege en inde on aurait pu s attendre a ce que ces reformes importantes accroissent la reponse des prix de l investissement privea cause i de l effet le chatelier ii de la plus forte elasticite de la demande de biens finaux et iii de la relaxation possible de la contrainte financiere les resultats empiriques fondes sur des specifications des methodes d estimation et des periodes d echantillonnage differentes suggerent un accroissement dramatique dans la reponse des prix l elasticite de l investissement par rapport au cout relatif du capital s est accru par un facteur de 5 apres le demantelement du regime raj

the effect of central bank transparency on exchange rate volatility abstract the increase in central bank transparency has been one of the main developments in central banking in the past two decades this leads to the question of the effect of central bank transparency on the volatility of exchange rates according to theoretical considerations more information could lead to either more precise forecasts or more noise trading this raises the need for an empirical estimation of the relationship the present study shows that the effect of central bank transparency on exchange rate volatility depends on a country s development while there is no effect of central bank transparency in the full sample and for developing countries transparency increases exchange rate fluctuations in developed countries

reference dependent risk attitudes we use koszegi and rabin s 2006 model of reference dependent utility and an extension of it that applies to decisions with delayed consequences to study preferences over monetary risk because our theory equates the reference point with recent probabilistic beliefs about outcomes it predicts specific ways in which the environment influences attitudes toward modest scale risk it replicates classical prospect theory including the prediction of distaste for insuring losses when exposure to risk is a surprise but implies first order risk aversion when a risk and the possibility of insuring it are anticipated a prior expectation to take on risk decreases aversion to both the anticipated and additional risk for large scale risk the model allows for standard consumption utility to dominate reference dependent gain loss utility generating nearly identical risk aversion across situations

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