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Research Institute of Industrial Economics (IFN) Working Paper Series

No 20:
A Putty-Clay Model of Demand Uncertainty and Investment

James W. Albrecht and Albert G. Hart

Abstract: This paper uses a simple model to explore the effects of "increasing demand risk" on business fixed investment. We show that within a putty-clay framework an increase in demand uncertainty can be expected to have two countervailing effects. On the one hand increasing risk tends to induce a firm to increase its capacity, but on the other hand the optimal capital intensity of that capacity decreases.

Keywords: Firm investment; Firm strategy; Production; (follow links to similar papers)

JEL-Codes: D92; L11; (follow links to similar papers)

15 pages, December 1979, Revised April 1982

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