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Lags, Convexity and the Investment-Uncertainty Relationship

Yishay Maoz ()

General Economics and Teaching from EconWPA

Abstract: The effect that investment lags has on the uncertainty-investment relationship is studied by modifying the Bar-Ilan and Strange (1996) model in a manner that enables analytical solution. It turns out that: (i) If the time lag is sufficiently small, uncertainty affects investment negatively; (ii) A sufficiently large time lag engenders an inverse u-shape relationship between the degree of uncertainty and the profit level that triggers investment; (iii) When such an inverse u- shape exists, the higher is the length of the time lag (or the degree of profit convexity) the wider is the range of a positive uncertainty- investment relationship.

Keywords: Investment; Uncertainty; Time to build (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec
Date: 2005-10-06
Note: Type of Document - pdf; pages: 17
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