Some recent contributions (Nakamura (1999), Saltari and Ticchi (2005)) assess the effects of an increase in price uncertainty on investment. These papers suggest that investments react negatively to uncertainty when the risk aversion index characterizing firm's preferences is lower than one but higher than the labour income share of output. We show that the this result crucially depends on the assumption of complete capital depreciation after production. When realistic values for the capital depreciation parameter are taken into account, the investment-uncertainty relation is negative for values of the risk-aversion index larger than unity.
Femminis, G., Risk-aversion and the uncertainty-investment relationship: the role of capital depreciation, <<JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION>>, 2008; 65 (3-4): 585-591. [doi:10.1016/j.jebo.2006.03.003] [http://hdl.handle.net/10807/11436]
Risk-aversion and the uncertainty-investment relationship: the role of capital depreciation
Femminis, Gianluca
2008
Abstract
Some recent contributions (Nakamura (1999), Saltari and Ticchi (2005)) assess the effects of an increase in price uncertainty on investment. These papers suggest that investments react negatively to uncertainty when the risk aversion index characterizing firm's preferences is lower than one but higher than the labour income share of output. We show that the this result crucially depends on the assumption of complete capital depreciation after production. When realistic values for the capital depreciation parameter are taken into account, the investment-uncertainty relation is negative for values of the risk-aversion index larger than unity.
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