To Buy or Not to Buy? Uncertainty, Irreversibility and Heterogeneous Investment Dynamics in Italian Company Data

 
Author/Editor: Bond, Stephen ; Lombardi, Domenico
 
Publication Date: June 01, 2004
 
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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
 
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.
 
Series: Working Paper No. 04/104
Subject(s): Investment incentives | Italy | Economic models

Author's Keyword(s): Investment | Real Options | Panel Data
 
English
Publication Date: June 01, 2004
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA1042004 Pages: 28
Price:
US$15.00 (Academic Rate:
US$15.00 )
 
 
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