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A Putty-Clay Model of Demand Uncertainty and Investment

Author

Listed:
  • Albrecht, James W.

    (Research Institute of Industrial Economics (IFN))

  • Hart, Albert G.

    (Research Institute of Industrial Economics (IFN))

Abstract

This paper uses a simple model to explore the effects of "increasing demand risk" on business fixed investment. We show that within a putty-clay framework an increase in demand uncertainty can be expected to have two countervailing effects. On the one hand increasing risk tends to induce a firm to increase its capacity, but on the other hand the optimal capital intensity of that capacity decreases.

Suggested Citation

  • Albrecht, James W. & Hart, Albert G., 1979. "A Putty-Clay Model of Demand Uncertainty and Investment," Working Paper Series 20, Research Institute of Industrial Economics, revised Apr 1982.
    • Handle: RePEc:hhs:iuiwop:0020
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    More about this item

    Keywords

    Firm investment; Firm strategy; Production;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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