Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

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

James W. Albrecht and Albert G. Hart
Additional contact information
James W. Albrecht: Research Institute of Industrial Economics (IFN)
Albert G. Hart: Research Institute of Industrial Economics (IFN)

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

JEL-codes: D92; L11

15 pages, First version: December 1979. Revised: April 1982.

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