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The dynamics of investment under uncertainty

Bloom, N.; Bond, S.; van Reenen, J.; (2001) The dynamics of investment under uncertainty. (IFS Working Papers W01/05). Institute for Fiscal Studies: London, UK. Green open access

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Abstract

We derive robust predictions on the effects of uncertainty on short-run investment dynamics in a broad class of models with (partial) irreversibility. When their environments becomes more uncertain, firms become more cautious and less responsive to demand shocks. This result contrasts with the long-run analysis, in which the effect of real options on the level of the capital stock is ambiguous. An investment model is estimated to test these theoretical predications using a panel of UK firms and a stock returns-based measure of uncertainty. As predicted we find that uncertainty reduces firms' responsiveness to demand shocks.

Type: Working / discussion paper
Title: The dynamics of investment under uncertainty
Open access status: An open access version is available from UCL Discovery
Publisher version: http://www.ifs.org.uk/publications/browse/type/wp
Language: English
Keywords: JEL classification: D92, E22, D8, C23. Investment, uncertainty, real options, panel data
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: http://discovery.ucl.ac.uk/id/eprint/3864
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