Variations in the Effect of Uncertainty on Different Types of Investment: An Empirical Investigation

Australian Economic Papers, vol. 38, no. 4, pp. 481-492, 1999

Posted: 30 Mar 2016 Last revised: 5 Apr 2016

See all articles by Rajeev K. Goel

Rajeev K. Goel

Illinois State University - Department of Economics

Rati Ram

Illinois State University - Department of Economics

Date Written: 1999

Abstract

Several recent studies, including those by Pindyck (1991), Pindyck and Solimano (1993), Dixit and Pindyck (1994), Episcopos (1995), and Abel et al. (1996), suggest an important linkage between the effect of uncertainty on investment and the irreversibility of the latter. This paper broadly follows the foregoing tradition, but makes the point that it should be possible to distinguish between investments with different degrees of irreversibility and to relate the effect of uncertainty with the degree of investment irreversibility. A simple empirical illustration is provided by using pooled annual data for 12 OECD countries and estimating fixed-effects models for different types of investments. Although caution is appropriate in interpreting the estimates, the evidence suggests that the adverse effect of uncertainty is more severe on investments that have a greater degree of irreversibility.

Suggested Citation

Goel, Rajeev K. and Ram, Rati, Variations in the Effect of Uncertainty on Different Types of Investment: An Empirical Investigation (1999). Australian Economic Papers, vol. 38, no. 4, pp. 481-492, 1999. Available at SSRN: https://ssrn.com/abstract=2755727

Rajeev K. Goel (Contact Author)

Illinois State University - Department of Economics ( email )

Normal, IL 61790-4200
United States

Rati Ram

Illinois State University - Department of Economics ( email )

Normal, IL 61790-4200
United States
309-438-7101 (Phone)
309-438-5228 (Fax)

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