Capital depreciation and the investment-uncertainty relationship: The role of symmetric adjustment costs

Some recent contributions (Femminis, 2007 Nakamura, 2002) demonstrate the important roles of capital depreciation in the investment-uncertainty relationship. This paper highlights the role of symmetric adjustment costs in the case that capital depreciates completely after finite periods. Various uncertainty-investment relationships emerge depending on the curvature of convex adjustment cost function. While investment decreases with uncertainty if the curvature is small, it increases with uncertainty if the curvature is large. If the curvature is in between, the investment-uncertainty relationship shows an inverted U-shaped curve: investment first increases and then decreases with uncertainty.