Investment and Subjective Uncertainty

Nicholas Bloom, Steven Davis, Lucia Foster, Scott Ohlmacher and Itay Saporta-Eksten ()
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Itay Saporta-Eksten: Tel Aviv University

No 15710, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: A longstanding challenge in evaluating the impact of uncertainty on investment is obtaining measures of managers' subjective uncertainty. We address this challenge by using a detailed new survey measure of subjective uncertainty collected by the U.S. Census Bureau for approximately 25,000 manufacturing plants. We find three key results. First, investment is strongly and robustly negatively associated with higher uncertainty, with a two standard deviation increase in uncertainty associated with about a 6% reduction in investment. Second, uncertainty is also negatively related to employment growth and overall shipments (sales) growth, which highlights the damaging impact of uncertainty on firm growth. Third, flexible inputs like rental capital and temporary workers show a positive relationship to uncertainty, demonstrating that businesses switch from less flexible to more flexible factor inputs at higher levels of uncertainty.

Keywords: business-level uncertainty; subjective expectations (search for similar items in EconPapers)
JEL-codes: L2 M2 O32 O33 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2022-11
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Published - published as '2020 Klein Lecture—Investment and Subjective Uncertainty' in: International Economic Review, 2024, 65 (4), 1591 - 1606

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Related works:
Working Paper: Investment and Subjective Uncertainty (2022)
Working Paper: Investment and Subjective Uncertainty (2022)
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