Uncertainty and investment dynamics
By: Nick Bloom, Stephen Bond, and John Van Reenen
Contributors: Bond, Stephen; Van Reenen, John; London School of Economics and Political Science. Centre for Economic Performance
Series: CEP discussion paper -- no. 739
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2006
Place of publication: London
Language: eng
Format: [electronic resource] /
Description: This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impact effect of demand shocks on investment. Uncertainty increases real option values making firms more cautious when investing or disinvesting. This is confirmed both numerically for a model with a rich mix of adjustment costs, time-varying uncertainty, and aggregation over investment decisions and time, and also empirically for a panel of manufacturing firms. These cautionary effects of uncertainty are large - going from the lower quartile to the upper quartile of the uncertainty distribution typically halves the first year investment response to demand shocks. This implies the responsiveness of firms to any given policy stimulus may be much lower in periods of high uncertainty, such as after major shocks like OPEC I and 9/11.
Notes: Title from PDF file (viewed on Sept. 26, 2006).

"August 2006."

Includes bibliographical references.

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