Uncertainty and Investment Dynamics

Nicholas Bloom (), Stephen Bond and John van Reenen ()

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impacteffect of demand shocks on investment. Uncertainty increases real option values makingfirms more cautious when investing or disinvesting. This is confirmed both numerically for amodel with a rich mix of adjustment costs, time-varying uncertainty, and aggregation overinvestment decisions and time, and also empirically for a panel of manufacturing firms.These cautionary effects of uncertainty are large - going from the lower quartile to the upperquartile of the uncertainty distribution typically halves the first year investment response todemand shocks. This implies the responsiveness of firms to any given policy stimulus may bemuch lower in periods of high uncertainty, such as after major shocks like OPEC I and 9/11.

Keywords: Investment; uncertainty; real options; panel data (search for similar items in EconPapers)
JEL-codes: D92 E22 D8 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-mac
Date: 2006-08
View list of references

Downloads: (external link)
http://cep.lse.ac.uk/pubs/download/dp0739.pdf (application/pdf)

Related works:
Working Paper: Uncertainty and Investment Dynamics (2006)
Journal Article: Uncertainty and Investment Dynamics (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0739

Access Statistics for this paper

More papers in CEP Discussion Papers from Centre for Economic Performance, LSE
Series data maintained by ().