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Author/Editor:
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Bond, Stephen ; Lombardi, Domenico
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Publication Date:
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June 01, 2004
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Electronic Access:
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Free Full text
(PDF file size is 451KB).
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
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Summary:
This study tests for the presence of real options effects induced by uncertainty and (partial) irreversibility on fixed capital investment using Italian company data. The approach recognizes that firm-level investment spending may, itself, be aggregated over multiple investment decisions in separate types of capital goods and emphasizes effects of uncertainty on short-run investment dynamics. Using a survey-based measure of uncertainty related to the assessment of managers responsible for the firms' investment plans, the study finds evidence of heterogeneous and nonlinear dynamics pointing to a slower adjustment of investment in response to demand shocks at higher levels of uncertainty. The results also point to an additional source of nonlinearity originating from a convex response of investment to demand shocks.
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Order a print copy
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Series:
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Working Paper No. 04/104
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Subject(s):
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Investment incentives | Italy | Economic models
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Author's Keyword(s):
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Investment | Real Options | Panel Data |
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