Investment and Subjective Uncertainty

28 Pages Posted: 10 Nov 2022

See all articles by Nicholas Bloom

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Steven J. Davis

University of Chicago; National Bureau of Economic Research (NBER); Hoover Institution

Lucia Foster

U.S. Census Bureau - Center for Economic Studies

Scott Ohlmacher

U.S. Census Bureau - Center for Economic Studies

Itay Saporta Eksten

Tel Aviv University - Eitan Berglas School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: November 8, 2022

Abstract

A longstanding challenge in evaluating the impact of uncertainty on investment is obtaining measures of managers’ subjective uncertainty. We address this challenge by using a detailed new survey measure of subjective uncertainty collected by the U.S. Census Bureau for approximately 25,000 manufacturing plants. We find three key results. First, investment is strongly and robustly negatively associated with higher uncertainty, with a two standard deviation increase in uncertainty associated with about a 6% reduction in investment. Second, uncertainty is also negatively related to employment growth and overall shipments (sales) growth, which highlights the damaging impact of uncertainty on firm growth. Third, flexible inputs like rental capital and temporary workers show a positive relationship to uncertainty, demonstrating that businesses switch from less flexible to more flexible factor inputs at higher levels of uncertainty.

Keywords: Subjective expectations, business-level uncertainty

JEL Classification: L2, M2, O32, O33

Suggested Citation

Bloom, Nicholas and Davis, Steven J. and Foster, Lucia and Ohlmacher, Scott and Saporta Eksten, Itay, Investment and Subjective Uncertainty (November 8, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-149, Available at SSRN: https://ssrn.com/abstract=4273057 or http://dx.doi.org/10.2139/ssrn.4273057

Nicholas Bloom

Stanford University - Department of Economics ( email )

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HOME PAGE: http://economics.stanford.edu/faculty/bloom

National Bureau of Economic Research (NBER) ( email )

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Steven J. Davis (Contact Author)

University of Chicago ( email )

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National Bureau of Economic Research (NBER)

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Hoover Institution

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Lucia Foster

U.S. Census Bureau - Center for Economic Studies ( email )

4700 Silver Hill Road
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United States

Scott Ohlmacher

U.S. Census Bureau - Center for Economic Studies ( email )

4700 Silver Hill Road
Washington, DC 20233
United States

Itay Saporta Eksten

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

HOME PAGE: http://www.tau.ac.il/~itaysap/

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