Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2004:17: Investment and Uncertainty: A Theory-Based Empirical Approach

Mikael Carlsson
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Mikael Carlsson: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: This paper provides empirical evidence on the dynamic effects of uncertainty on firm-level capital accumulation. A novelty in this paper is that the firm-level uncertainty indicator is motivated and derived from a theoretical model, the neoclassical investment model with time to build. This model also serves as the base for the empirical work, where an error-correction approach is employed. I find a negative effect of uncertainty on capital accumulation, both in the short and the long run. This outcome cannot be explained by the model alone. Instead, the results suggest that the predominant mechanism at work stems from irreversibility constraints.

Keywords: Investment; Uncertainty; Dynamic Panel Data Models

JEL-codes: C33; D21; D80; E22

27 pages, October 6, 2004

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