Investment, Capacity, and Uncertainty: A Putty-Clay Approach
36 Pages Posted: 10 May 2004 Last revised: 19 Jul 2010
Date Written: April 2004
We embed the microeconomic decisions associated with investment under uncertainty, capacity utilization, and machine replacement in a general equilibrium model based on putty-clay technology. In the presence of irreversible factor proportions, a mean-preserving spread in the productivity of investment raises aggregate investment, productivity, and output. Increases in uncertainty have important dynamic implications, causing sustained increases in investment and hours and a medium-term expansion in the growth rate of labor productivity.
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