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Staff Papers Logo    September 1998
Volume 45, Number 3
Investment, Uncertainty, and Irreversibility in Ghana
By Catherine Pattillo

Full Text of This Article (PDF 112 K)

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 rasies the hurdle level that triggers investment, and uncertainty has a negative effect on investment levels that is greater for firms with more irreversible investment. [JEL D81,D92,C24]

1998 International Monetary Fund