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What do we know about Investment under Uncertainty?

Carruth, Alan, Dickerson, Andrew, Henley, Andrew (2000) What do we know about Investment under Uncertainty? Journal of Economic Surveys, 14 (2). pp. 119-154. ISSN 0950-0804. (doi:10.1111/1467-6419.00107) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided) (KAR id:7267)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided.
Official URL:
http://dx.doi.org/10.1111/1467-6419.00107

Abstract

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 uncertainty, 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.

Item Type: Article
DOI/Identification number: 10.1111/1467-6419.00107
Subjects: H Social Sciences > HB Economic Theory
Divisions: Divisions > Division of Human and Social Sciences > School of Economics
Depositing User: Alan Carruth
Date Deposited: 30 May 2009 07:25 UTC
Last Modified: 16 Nov 2021 09:45 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/7267 (The current URI for this page, for reference purposes)

University of Kent Author Information

Carruth, Alan.

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Dickerson, Andrew.

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