Investment, Uncertainty, and Irreversibility in Ghana

ByCatherine A Pattillo

December 1, 1997

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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

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.

Subject: Capital adequacy requirements, Econometric analysis, Economic sectors, Financial institutions, Financial regulation and supervision, Manufacturing, National accounts, Private investment, Probit models, Stocks

Keywords: Capital adequacy requirements, capital stock, cost of capital, firm investment model, firm owner, Ghana, hurdle level, investment, investment trigger, irreversible, Manufacturing, Private investment, Probit models, Stocks, uncertainty, uncertainty variable, WP

Pages:
37
Volume:
1997
DOI:
https://doi.org/10.5089/9781451858303.001
Issue:
169
Series:
Working Paper No. 1997/169
Stock No:
WPIEA1691997
ISBN:
9781451858303
ISSN:
1018-5941

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Notes

Also published in Staff Papers, Vol. 45, No. 3, September 1998.

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