Long-Run Investment under Uncertain Demand

14 Pages Posted: 18 Jul 2013  

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

Date Written: July 16, 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.

Keywords: Investment, Demand Uncertainty, Irreversibility

JEL Classification: C61, D92, E22

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

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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