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Variations in the Effect of Uncertainty on Different Types of Investment: An Empirical Investigation

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  • Rajeev K. Goel
  • Rati Ram

Abstract

Several recent studies, including those by Pindyck (1991), Pindyck and Solimano (1993), Dixit and Pindyck (1994), Episcopos (1995), and Abel et al. (1996), suggest an important linkage between the effect of uncertainty on investment and the irreversibility of the latter. This paper broadly follows the foregoing tradition, but makes the point that it should be possible to distinguish between investments with different degrees of irreversibility and to relate the effect of uncertainty with the degree of investment irreversibility. A simple empirical illustration is provided by using pooled annual data for 12 OECD countries and estimating fixed‐effects models for different types of investments. Although caution is appropriate in interpreting the estimates, the evidence suggests that the adverse effect of uncertainty is more severe on investments that have a greater degree of irreversibility.

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  • Rajeev K. Goel & Rati Ram, 1999. "Variations in the Effect of Uncertainty on Different Types of Investment: An Empirical Investigation," Australian Economic Papers, Wiley Blackwell, vol. 38(4), pages 481-492, December.
    • Handle: RePEc:bla:ausecp:v:38:y:1999:i:4:p:481-492
    DOI: 10.1111/1467-8454.00069
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    Cited by:

    1. Rajeev K. Goel & Michael A. Nelson, 2021. "How do firms use innovations to hedge against economic and political uncertainty? Evidence from a large sample of nations," The Journal of Technology Transfer, Springer, vol. 46(2), pages 407-430, April.
    2. George Geronikolaou & George Papachristou, 2011. "Is there an adverse effect of uncertainty on Venture Capital? The European evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 18(4), pages 383-388.
    3. Goel, Rajeev K. & Ram, Rati, 2001. "Irreversibility of R&D investment and the adverse effect of uncertainty: Evidence from the OECD countries," Economics Letters, Elsevier, vol. 71(2), pages 287-291, May.
    4. Masino, Serena, 2013. "Macro-Institutional Instability and the Incentive to Innovate," MPRA Paper 45178, University Library of Munich, Germany.
    5. Rajeev K. Goel & James R. Jones & James W. Saunoris, 2023. "Explaining vaccine hesitancy: A COVID‐19 study of the United States," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 1073-1087, March.
    6. Mark J. Koetse & Henri L.F. de Groot & Raymond J.G.M. Florax, 2006. "The Impact of Uncertainty on Investment: A Meta-Analysis," Tinbergen Institute Discussion Papers 06-060/3, Tinbergen Institute.
    7. Gabriel P. Mathy, 2020. "How much did uncertainty shocks matter in the Great Depression?," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 14(2), pages 283-323, May.
    8. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38830, University Library of Munich, Germany.
    9. Konstantinos Drakos, 2006. "A note on uncertainty and investment across the spectrum of irreversibility," Applied Economics Letters, Taylor & Francis Journals, vol. 13(13), pages 873-876.
    10. Mark J. Koetse & Henri L.F. de Groot & Raymond J.G.M. Florax, 2011. "A Meta-Regression Analysis of the Investment–Uncertainty Relationship," Chapters, in: Raymond J.G.M. Florax & Henri L.F. de Groot & Peter Mulder (ed.), Improving Energy Efficiency through Technology, chapter 7, Edward Elgar Publishing.
    11. Le Khuong Ninh & Niels Hermes & Ger Lanjouw, 2004. "Investment, uncertainty and irreversibility," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(2), pages 307-332, June.
    12. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38766, University Library of Munich, Germany.
    13. Rajeev K. Goel & Michael A. Nelson, 2023. "Aggressive COVID‐19 lockdown policies: What factors significantly drove them across nations?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2211-2222, June.
    14. Konstantinos Drakos, 2012. "Extent and intensity of investment with multiple capital goods," Applied Economics, Taylor & Francis Journals, vol. 44(22), pages 2799-2810, August.
    15. Guido Fioretti, 2005. "A Model of Primary and Secondary Waves in Investment Cycles," Computational Economics, Springer;Society for Computational Economics, vol. 24(4), pages 357-381, June.
    16. Rajeev K. Goel & Rati Ram, 2013. "Economic uncertainty and corruption: evidence from a large cross-country data set," Applied Economics, Taylor & Francis Journals, vol. 45(24), pages 3462-3468, August.
    17. Ibrahim, Mansor H. & Ahmed, Huson Joher Ali, 2014. "Permanent and transitory oil volatility and aggregate investment in Malaysia," Energy Policy, Elsevier, vol. 67(C), pages 552-563.
    18. Gerald Stuber, 2001. "Implications of Uncertainty about Long-Run Inflation and the Price Level," Staff Working Papers 01-16, Bank of Canada.

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