No. 289 - Investment and Demand Uncertainty
Theoretical models of investment under uncertainty predict that the sign and the strength of the investment uncertainty relationship is in principle ambiguous and can vary greatly across groups of firms depending on the degree of irreversibility of investment and the market power of the firm. This paper investigates the effects of uncertainty on the investment decisions of a sample of Italian manufacturing firms, using information on the subjective probability distribution of future demand for firms' products according to the entrepreneurs. The results support the view that uncertainty slows down capital accumulation. Consistent with the predictions of the theory, there is considerable heterogeneity in the effect of uncertainty on investment: it is stronger for firms that cannot easily reverse investment decisions and for those with substantial market power. We show that the negative effect of uncertainty on investment cannot be due to uncertainty proxying for liquidity constraints. Evidence of a negative effect of past uncertainty on hours currently worked reinforces the conclusion of a negative relationship between uncertainty and investment.
A previous version of this paper was presented at the "CEPR European Summer Symposium in Macroeconomics", 28 June-2 July 1995, Perugia and at seminars at University College, London and at the University of Torino.
Full text
-
30 November 1996
YouTube
X - Banca d'Italia
Linkedin
RSS
E-mail Alert
