Uncertainty, investment and capital accumulation: a structural econometric approach

Thesis

This thesis contributes to the empirical literature about how uncertainty affects firm-level investment behavior and capital accumulation using a structural econometric approach. Chapter 2 surveys the literature and highlights that there are two key channels through which uncertainty may affect investment decisions. One reflects the non-linearity of operating profits in stochastic demand or productivity parameters, summarized as the Hartman-Abel-Caballero (HAC) effect. Another reflects frictions in capital adjustment, summarized by different forms of capital adjustment costs: partial irreversibility, a fixed cost of undertaking any investment and quadratic adjustment costs. Chapter 3 presents simulation evidence about the effects of uncertainty on investment dynamics and capital accumulation through different forms of adjustment costs. Using the Method of Simulated Moments, Chapters 4 and 5 estimate fully parametric structural investment models, for panels of Brazilian and UK manufacturing firms, respectively. Chapter 4 investigates the effects of reducing capital adjustment costs. Counterfactual simulations indicate that investment would be much more responsive to new information about profitability if firms in Brazil faced a lower level of adjustment costs. A lower level of adjustment costs would also induce firms to operate with substantially higher capital stocks. Both these effects are mainly due to the importance of the estimated quadratic adjustment costs. Chapter 5 then investigates the effects of changing the level of uncertainty. The estimated investment models predict a small effect of uncertainty on investment dynamics in the short-run, and a negative and potentially large effect of uncertainty on capital accumulation in the long-run. The long-run effect of uncertainty operates through the negative effect of quadratic adjustment costs in the baseline model, or through a richer combination of effects in an extended model that allows discount rates to vary with the level of uncertainty.

Authors: Wu, G

• Publication date: 2009
• DOI: 10.5287/ora-zgp6xvpke
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: Oxford University, UK
• Language: English
• Keywords: structural estimation; uncertainty; investment
• Subjects: Macro and international economics; Econometrics