Investment, capacity, and uncertainty: a putty-clay approach

Simon Gilchrist and John Williams

No 2002-03, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: In this paper, we embed the microeconomic decisions associated with investment under uncertainty, capacity utilization, and machine replacement in a general equilibrium model based on putty-clay technology. We show that the combination of log-normally distributed idiosyncratic productivity uncertainty and Leontief utilization choice yields an aggregate production function that is easily characterized in terms of hazard rates for the standard normal distribution. At low levels of idiosyncratic uncertainty, the short-run elasticity of supply is substantially lower than the elasticity of supply obtained from a fully-flexible Cobb-Douglas alternative. In the presence of irreversible factor proportions, an increase in idiosyncratic uncertainty about the productivity of an investment project typically reduces investment at the micro level, but it raises aggregate investment. Increases in uncertainty also have important dynamic implications, causing sustained increases in investment and hours and a medium-term expansion in the growth rate of labor productivity.

Keywords: Productivity; Industrial capacity (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (2)

Published in Review of Economic Dynamics, v. 8, no. 1 (January 2005) pp. 1-27

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Related works:
Journal Article: Investment, Capacity, and Uncertainty: A Putty-Clay Approach (2005)
Working Paper: Investment, Capacity, and Uncertainty: A Putty-Clay Approach (2004)
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