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Investment under uncertainty: The nature of demand shocks and the expected profitability of capital

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  • Gil, Pedro Mazeda

Abstract

This paper analyses the disparity regarding the sign of the investment–uncertainty relationship in models of investment under symmetric adjustment costs. That sign is determined by the shape of the profit function, which is related to the nature of demand shocks.

Suggested Citation

  • Gil, Pedro Mazeda, 2012. "Investment under uncertainty: The nature of demand shocks and the expected profitability of capital," Economics Letters, Elsevier, vol. 114(2), pages 154-156.
    • Handle: RePEc:eee:ecolet:v:114:y:2012:i:2:p:154-156
    DOI: 10.1016/j.econlet.2011.10.010
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    References listed on IDEAS

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    1. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 391-415.
    2. Abel, Andrew B. & Eberly, Janice C., 1999. "The effects of irreversibility and uncertainty on capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 339-377, December.
    3. Kwanho Shin & Jaewoo Lee, 2000. "The Role of a Variable Input in the Relationship between Investment and Uncertainty," American Economic Review, American Economic Association, vol. 90(3), pages 667-680, June.
    4. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    5. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    6. Bontempi, Maria Elena & Golinelli, Roberto & Parigi, Giuseppe, 2010. "Why demand uncertainty curbs investment: Evidence from a panel of Italian manufacturing firms," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 218-238, March.
    7. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
    8. Guo, Xin & Miao, Jianjun & Morellec, Erwan, 2005. "Irreversible investment with regime shifts," Journal of Economic Theory, Elsevier, vol. 122(1), pages 37-59, May.
    9. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
    10. Smith, Kenneth R., 1969. "The effect of uncertainty on monopoly price, capital stock and utilization of capital," Journal of Economic Theory, Elsevier, vol. 1(1), pages 48-59, June.
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    Cited by:

    1. Kevin J. Fox & Nicholas Oulton & María Sebastiá-Barriel, 2017. "Effects of Financial Crises on Productivity, Capital and Employment," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 63, pages 90-112, February.

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    More about this item

    Keywords

    Demand uncertainty; Expected profitability of capital; Jensen’s inequality;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other

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