Abstract

https://ssrn.com/abstract=2294463
 


 



Long-Run Investment under Uncertain Demand


Luca Di Corato


Swedish University of Agricultural Sciences - Department of Economics

Michele Moretto


University of Padua - Department of Economics; Fondazione Eni Enrico Mattei (FEEM)

Sergio Vergalli


University of Brescia - Department of Economics; Fondazione Eni Enrico Mattei (FEEM), Milan

July 16, 2013

FEEM Working Paper No. 65.2013

Abstract:     
In the literature investigating the impact of uncertainty on short-run and long-run investment, most authors have used a log linear profit function. This functional form has been generally considered a reasonable approximation for more general ones and has the advantage of providing closed form solutions for both short-run investment rule and long-run rate of capital accumulation. In this paper, we consider a firm facing a linear demand function with additive shocks and present a technique for the analytical approximation of the long-run average rate of capital accumulation for the case of an inverted U-shape profit function. We then compare the long-run rates of capital accumulation calculated under both assumptions within a plausible range of parameter values. We notice significant differences and conclude that the choice of a log linear functional form has a non-trivial impact on the magnitude of the long run rate of capital accumulation.

Number of Pages in PDF File: 14

Keywords: Investment, Demand Uncertainty, Irreversibility

JEL Classification: C61, D92, E22


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Date posted: July 18, 2013  

Suggested Citation

Di Corato, Luca and Moretto, Michele and Vergalli, Sergio, Long-Run Investment under Uncertain Demand (July 16, 2013). FEEM Working Paper No. 65.2013. Available at SSRN: https://ssrn.com/abstract=2294463 or http://dx.doi.org/10.2139/ssrn.2294463

Contact Information

Luca Di Corato (Contact Author)
Swedish University of Agricultural Sciences - Department of Economics ( email )
Box 7013 (Johan Brauners väg 3)
Uppsala, 750 07
Sweden
+4618671758 (Phone)
+4618673502 (Fax)
HOME PAGE: http://www.ekon.slu.se
Michele Moretto
University of Padua - Department of Economics ( email )
via Del Santo 33
Padova, 35123
Italy
+39 049 8274265 (Phone)
+39 049 8274211 (Fax)
Fondazione Eni Enrico Mattei (FEEM) ( email )
Corso Magenta 63
20123 Milan
Italy
Sergio Vergalli
University of Brescia - Department of Economics ( email )
Via San Faustino 74B
Brescia, 25122
Italy
Fondazione Eni Enrico Mattei (FEEM), Milan ( email )
Corso Magenta 63
20123 Milan
Italy
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