Pursuing the Wrong Options? Adjustment Costs and the Relationship between Uncertainty and Capital Accumulation

bel and Eberly (1999) show that the effect of uncertainty on long run capital accumulation is ambiguous in a real options model with irreversible investment. We show that a higher level of uncertainty tends to reduce expected capital stock levels in a model with strictly convex adjustment costs. Simulations suggest that this negative impact of uncertainty on capital accumulation may be substantial. We also provide some intuition for this result.

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Year of publication:	2010-05-17
Authors:	Bond, Stephen R. ; Söderbom, Måns ; Wu, Guiying
Institutions:	Nationalekonomiska institutionen, Handelshögskolan
Subject:	Uncertainty \| real options \| adjustment costs \| capital accumulation

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Extent:	text/html
Series:	Working Papers in Economics.
Type of publication:	Book / Working Paper
Notes:	The text is part of a series Working Papers in Economics Number 449 11 pages
Classification:	C15 - Statistical Simulation Methods; Monte Carlo Methods ; D92 - Intertemporal Firm Choice and Growth, Investment, or Financing ; E22 - Capital; Investment (including Inventories); Capacity
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10008552187