Political Uncertainty, the Formation of New Activities and Growth
Joshua Aizenman
Chapter 8 in The Political Dimension of Economic Growth, 1998, pp 154-170 from Palgrave Macmillan
Abstract:
Abstract The traditional neoclassical model has played down the role of uncertainty in explaining investment and growth. This attitude stems from two observations — first, the direction of the impact of uncertainty on investment is ambiguous. Second, the magnitude of this effect is of a second-order importance — proportional to the variance of shocks. In neoclassical models concavity/convexity arguments ultimately determine the impact of uncertainty on investment. As Abel (1983) showed, in a competitive environment volatility increases investment at a rate proportional to the variance of shocks, whereas Caballero (1991) showed that market power weakens (and may even reverse) the impact of volatility on investment. Allowing for non-reversibility of investment does not resolve the ambiguity of the predicted effects of volatility on investment, as has been illustrated by Pindyck and Solimano (1993) and Dixit and Pindyck (1994). A logical consequence of these considerations is that uncertainty, driven by policy or nature, has been played down as an explanatory factor by the neoclassical investment and growth models. Instead, the focus has been on the first moment (the mean) and not the second moment (the volatility) of policies and shocks.
Keywords: Foreign Direct Investment; Risk Premium; Marginal Utility; Labour Income; Capital Good (search for similar items in EconPapers)
Date: 1998
References: Add references at CitEc
Citations: View citations in EconPapers (1)
There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.
Related works:
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: https://EconPapers.repec.org/RePEc:pal:intecp:978-1-349-26284-7_8
Ordering information: This item can be ordered from
http://www.palgrave.com/9781349262847
DOI: 10.1007/978-1-349-26284-7_8
Access Statistics for this chapter
More chapters in International Economic Association Series from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().