Uncertainty and Investment Dynamics / Nick Bloom, John Van Reenen, Stephen Bond.

Format:

Book

Author/Creator:

Bloom, Nick.

Contributor:

National Bureau of Economic Research.

Van Reenen, John.

Bond, Stephen.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12383.

NBER working paper series no. w12383

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impact effect of demand shocks on investment. Uncertainty increases real option values making firms more cautious when investing or disinvesting. This is confirmed both numerically for a model with a rich mix of adjustment costs, time-varying uncertainty, and aggregation over investment decisions and time, and also empirically for a panel of manufacturing firms. These cautionary effects of uncertainty are large - going from the lower quartile to the upper quartile of the uncertainty distribution typically halves the first year investment response to demand shocks. This implies the responsiveness of firms to any given policy stimulus may be much lower in periods of high uncertainty, such as after major shocks like OPEC I and 9/11.

Notes:

Print version record

July 2006.