Investment, Capacity, and Uncertainty: A Putty-Clay Approach

FRB of San Francisco Working Paper No. 2002-03

36 Pages Posted: 10 May 2005

See all articles by Simon Gilchrist

Simon Gilchrist

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

John C. Williams

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: May 2002

Abstract

In this paper, 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. We show that the combination of log-normally distributed idiosyncratic productivity uncertainty and Leontief utilization choice yields an aggregate production function that is easily characterized in terms of hazard rates for the standard normal distribution. At low levels of idiosyncratic uncertainty, the short-run elasticity of supply is substantially lower than the elasticity of supply obtained from a fully-flexible Cobb-Douglas alternative. In the presence of irreversible factor proportions, an increase in idiosyncratic uncertainty about the productivity of an investment project typically reduces investment at the micro level, but it raises aggregate investment. Increases in uncertainty also have important dynamic implications, causing sustained increases in investment and hours and a medium-term expansion in the growth rate of labor productivity.

Keywords: Putty-clay, vintage capital, irreversibility, capacity utilization

JEL Classification: D24, E22, E23

Suggested Citation

Gilchrist, Simon and Williams, John C., Investment, Capacity, and Uncertainty: A Putty-Clay Approach (May 2002). FRB of San Francisco Working Paper No. 2002-03. Available at SSRN: https://ssrn.com/abstract=721024 or http://dx.doi.org/10.2139/ssrn.721024

Simon Gilchrist (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John C. Williams

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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