Uncertainty and Investment Options

Nancy Stokey
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Nancy Stokey: University of Chicago

No 251, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a simple model in which uncertainty about future tax policy leads to a temporary reduction in investment. The basic idea is that policy uncertainty creates uncertainty about the profitability of investment. If the uncertainty is likely to be resolved in the not-too-distant future, firms rationally delay committing resources to irreversible projects, reducing current investment. When the uncertainty is resolved, investment recovers, generating a temporary boom. The size of the boom depends on the realization of the fiscal uncertainty, with lower realizations of the tax rate producing larger booms.

Date: 2013
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-ppm
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:251

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