Investment and Demand Uncertainty

This paper investigates the effects of uncertainty on the investment decisions of a sample of Italian manufacturing firms, using information on the subjective probability distribution of future demand for firms' products according to the entrepreneurs. The results support the view that uncertai...

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Bibliographic Details
Published in:The Quarterly journal of economics 1999-02, Vol.114 (1), p.185-227
Main Authors: Guiso, Luigi, Parigi, Giuseppe
Format: Article
Language:English
Subjects:
Capital formation
Capital investments
Capital stocks
Coefficients
Decision-making
Economic aspects
Economic theory
Economic uncertainty
Financial investments
Investment credit
Investment decisions
Investment plans
Investment policy
Investments
Manufacturing
Market power
Planned investments
Probability distribution
Risk (Economics)
Studies
Uncertainty
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Summary:This paper investigates the effects of uncertainty on the investment decisions of a sample of Italian manufacturing firms, using information on the subjective probability distribution of future demand for firms' products according to the entrepreneurs. The results support the view that uncertainty weakens the response of investment to demand thus slowing down capital accumulation. Consistent with the predictions of the theory, there is considerable heterogeneity in the effect of uncertainty on investment: it is stronger for firms that cannot easily reverse investment decisions and for those with substantial market power. We show that the negative effect of uncertainty on investment cannot be explained by uncertainty proxying for liquidity constraints.
ISSN:0033-5533
1531-4650
DOI:10.1162/003355399555981