Long-run Investment under Uncertain Demand

Luca Di Corato (), Michele Moretto and Sergio Vergalli

No 2013.65, Working Papers from Fondazione Eni Enrico Mattei

Abstract: In the literature investigating the impact of uncertainty on short-run and long-run investment, most authors have used a log linear profit function. This functional form has been generally considered a reasonable approximation for more general ones and has the advantage of providing closed form solutions for both short-run investment rule and long-run rate of capital accumulation. In this paper, we consider a firm facing a linear demand function with additive shocks and present a technique for the analytical approximation of the long-run average rate of capital accumulation for the case of an inverted U-shape profit function. We then compare the long-run rates of capital accumulation calculated under both assumptions within a plausible range of parameter values. We notice significant differences and conclude that the choice of a log linear functional form has a non-trivial impact on the magnitude of the long run rate of capital accumulation.

Keywords: Investment; Demand Uncertainty; Irreversibility (search for similar items in EconPapers)
JEL-codes: C61 D92 E22 (search for similar items in EconPapers)
Date: 2013-06
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Long-run investment under uncertain demand (2014)
Working Paper: Long-run Investment under Uncertain Demand (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2013.65

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