To Buy or Not to Buy? Uncertainty, Irreversibility, and Heterogeneous Investment Dynamics in Italian Company Data

Stephen R. Bond and Domenico Lombardi
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Stephen R. Bond: International Monetary Fund
Domenico Lombardi: International Monetary Fund

IMF Staff Papers, 2006, vol. 53, issue 3, 2

Abstract: This study tests for the presence of real options effects induced by uncertainty and (partial) irreversibility on fixed capital investment using Italian company data. Our approach recognizes that firm-level investment spending may, itself, be aggregated over multiple investment decisions in separate types of capital goods and empha-sizes effects of uncertainty on short-run investment dynamics. Using a survey-based measure of uncertainty related to the assessment of managers responsible for the firms' investment plans, we find evidence of heterogeneous and nonlinear dynamics pointing to a slower adjustment of investment in response to demand shocks at higher levels of uncertainty. Our results also point to an additional source of nonlinearity originating from a convex response of investment to demand shocks. Copyright 2006, International Monetary Fund

JEL-codes: C23 D8 D92 E22 (search for similar items in EconPapers)
Date: 2006
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