Pursuing the Wrong Options? Adjustment Costs and the Relationship between Uncertainty and Capital Accumulation

• Abel and Eberly (1999) show that the effect of uncertainty on long run capital accumulation is ambiguous in a real options model with irreversible investment. We show that a higher level of uncertainty tends to reduce expected capital stock levels in a model with strictly convex adjustment costs. Simulations suggest that this negative impact of uncertainty on cap- ital accumulation may be substantial. We also provide some intuition for this result.

Ämnesord

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Nationalekonomi (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Economics (hsv//eng)

Nyckelord

Uncertainty

real options

adjustment costs

capital accumulation

Publikations- och innehållstyp

vet (ämneskategori)

rap (ämneskategori)