Abstract

http://ssrn.com/abstract=261552
 
 

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The Dynamics of Investment Under Uncertainty


Nicholas Bloom


Stanford University - Department of Economics; London School of Economics - Centre for Economic Performance (CEP); National Bureau of Economic Research (NBER)

Stephen R. Bond


Nuffield College; Institute for Fiscal Studies (IFS)

John Van Reenen


London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

February 2001

IFS Working Paper No. W01/05

Abstract:     
We derive robust predictions on the effects of uncertainty on short run investment dynamics in a broad class of models with (partial) irreversibility. When their environment becomes more uncertain firms become more cautious and less responsive to demand shocks. This result contrasts with the long run analysis, in which the effect of real options on the level of the capital stock is ambiguous. An investment model is estimated to test these theoretical predictions using a panel of UK firms and a stock returns-based measure of uncertainty. As predicted we find that uncertainty reduces firms' responsiveness to demand shocks.

Number of Pages in PDF File: 57

Keywords: Investment, uncertainty, real options, panel data

JEL Classification: D92, E22, D8, C23

working papers series


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Date posted: March 21, 2001  

Suggested Citation

Bloom, Nicholas and Bond, Stephen R. and Van Reenen, John, The Dynamics of Investment Under Uncertainty (February 2001). IFS Working Paper No. W01/05. Available at SSRN: http://ssrn.com/abstract=261552 or http://dx.doi.org/10.2139/ssrn.261552

Contact Information

Nicholas Bloom (Contact Author)
Stanford University - Department of Economics ( email )
Landau Economics Building, Room 231
579 Serra Mall
Stanford, CA 94305-6072
United States
650-725-7836 (Phone)
HOME PAGE: http://economics.stanford.edu/faculty/bloom
London School of Economics - Centre for Economic Performance (CEP) ( email )
Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7408 (Phone)
HOME PAGE: http://cep.lse.ac.uk/people/bio.asp?id=1498
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Stephen R. Bond
Nuffield College ( email )
Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 278 674 (Phone)
+44 1865 278 621 (Fax)
Institute for Fiscal Studies (IFS)
7 Ridgmount Street
London, WC1E 7AE
United Kingdom
+44 20 7291 4800 (Phone)
+44 20 7323 4780 (Fax)
John Michael Van Reenen
London School of Economics - Centre for Economic Performance (CEP) ( email )
Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6976 (Phone)
+44 20 7955 6848 (Fax)
Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States

Institute for Fiscal Studies (IFS) ( email )
7 Ridgmount Street
London, WC1E 7AE
United Kingdom
+44 20 7240 6740 (Phone)
+44 20 7240 6136 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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