Investment, Uncertainty, and Irreversibility in Ghana

Abstract

Panel data on Ghanaian manufacturing firms are used to test predictions from models of irreversible investment under uncertainty. Information on the entrepreneur`s subjective probability distribution over future demand for the firm`s products is used to construct the expected variance of demand, which is used as a measure of uncertainty. Empirical results support the prediction that firms wait to invest until the marginal revenue product of capital reaches a firm-specific hurdle level. Moreover, higher uncertainty raises the hurdle level that triggers investment, and uncertainty has a negative effect on investment levels that is greater for firms with more irreversible investment.

Keywords: investment, uncertainty, irreversible, Ghana

JEL Classification: D81, D92, C24