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1999•RePEc: Research Papers in EconomicsRequires access

The Uncertainty-Investment Relationship

Hjalmar Böhm, Michael Funke

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Abstract

Recent theoretical developments have highlighted the importance of irreversibility and uncertainty for investment demand. This paper presents a review of this literature with some new aspects. A structural q-type investment model is derived, which contains the information on the uncertainty effects of random variables that affect future profitability of firms. A general conclusion is that the effect of uncertainty upon investment and uncertainty is ambiguous. A necessary condition for any irreversibility-driven negative relationship between investment and uncertainty is the existence of imperfect competition.

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What this paper is about

Recent theoretical developments have highlighted the importance of irreversibility and uncertainty for investment demand. This paper presents a review of this literature with some new aspects. A structural q-type investment model is derived, which contains the information on the uncertainty effects of random variables that affect future profitability of firms. A general conclusion is that the effect of uncertainty upon investment and uncertainty is ambiguous. A necessary condition for any irreversibility-driven negative relationship between investment and uncertainty is the existence of imperfect competition.

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Available abstract

Recent theoretical developments have highlighted the importance of irreversibility and uncertainty for investment demand. This paper presents a review of this literature with some new aspects. A structural q-type investment model is derived, which contains the information on the uncertainty effects of random variables that affect future profitability of firms. A general conclusion is that the effect of uncertainty upon investment and uncertainty is ambiguous. A necessary condition for any irreversibility-driven negative relationship between investment and uncertainty is the existence of imperfect competition.

Key concepts: Profitability index, Investment (military), Economics, Competition (biology), Imperfect competition, Microeconomics, Imperfect, Investment decisions

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