Pursuing the Wrong Options? Adjustment Costs and the Relationship between Uncertainty and Capital Accumulation

Stephen R. Bond (), Mans Soderbom and Guiying Wu ()
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Stephen R. Bond: Nuffield College, Department of Economics and Centre for Business Taxation, University of Oxford, UK and Institute for Fiscal Studies

No 449, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: bel and Eberly (1999) show that the effect of uncertainty on long run capital accumulation is ambiguous in a real options model with irreversible investment. We show that a higher level of uncertainty tends to reduce expected capital stock levels in a model with strictly convex adjustment costs. Simulations suggest that this negative impact of uncertainty on capital accumulation may be substantial. We also provide some intuition for this result.

Keywords: Uncertainty; real options; adjustment costs; capital accumulation. (search for similar items in EconPapers)
JEL-codes: C15 D92 E22 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2010-05-17
New Economics Papers: this item is included in nep-sea
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http://hdl.handle.net/2077/22358 (text/html)

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Journal Article: Pursuing the wrong options? Adjustment costs and the relationship between uncertainty and capital accumulation (2011)
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