The I-r Hump: Irreversible Investment under Uncertainty

Colin Rose

Oxford Economic Papers, 2000, vol. 52, issue 3, 626-36

Abstract: It is well known that if investment is irreversible and uncertain, there exists a benefit to waiting. When such benefits are taken into account, the relationship between interest rates and investment may be quite complex. In particular, when net revenues follow a Gaussian random walk, model investment tends to zero at both high and low interest rates. That is, investment is a hump-shaped function of r. Copyright 2000 by Oxford University Press.

Date: 2000
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