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The Dynamics of Investment Under Uncertainty

IFS Working Paper No. W01/05

57 Pages Posted: 21 Mar 2001  

Nicholas Bloom

Stanford University - Department of Economics; 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)

Date Written: February 2001

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.

Keywords: Investment, uncertainty, real options, panel data

JEL Classification: D92, E22, D8, C23

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: https://ssrn.com/abstract=261552 or http://dx.doi.org/10.2139/ssrn.261552

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

National Bureau of Economic Research (NBER) ( email )

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Stephen R. Bond

Nuffield College ( email )

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Oxford, OX1 3BJ
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+44 1865 278 621 (Fax)

Institute for Fiscal Studies (IFS)

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John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

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London WC2A 2AE
United Kingdom
+44 20 7955 6976 (Phone)
+44 20 7955 6848 (Fax)

Stanford Graduate School of Business ( email )

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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)

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London, EC1V 3PZ
United Kingdom

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