A note on uncertainty and investment across the spectrum of irreversibility

Konstantinos Drakos

Applied Economics Letters, 2006, vol. 13, issue 13, 873-876

Abstract: There is a lack of consensus regarding the sign of the uncertainty-investment relationship, with a strand of the literature suggesting a positive sign, and the Real Options Theory (ROT) advocating a negative relationship. As a way of testing the ROT, this paper empirically investigates its main prediction that the negative effect of uncertainty on investment is an increasing function of the degree of irreversibility. Empirical results provide support for the ROT since uncertainty is found to exert a higher impact on investment spending across the irreversibility spectrum.

Date: 2006
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DOI: 10.1080/13504850500425451

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