Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 449: Pursuing the Wrong Options? Adjustment Costs and the Relationship between Uncertainty and Capital Accumulation
Stephen R. Bond (), Måns Söderbom () and Guiying Wu ()
Additional contact information
Stephen R. Bond: Nuffield College, Department of Economics and Centre for Business Taxation, University of Oxford, UK and Institute for Fiscal Studies
Måns Söderbom: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG
Guiying Wu: Nanyang Technological University, Singapore
Abstract: bel 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 capital accumulation may be substantial. We also provide some intuition for this result.
Keywords: Uncertainty; real options; adjustment costs; capital accumulation.
11 pages, May 17, 2010
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