What Do We Know About Investment Under Uncertainty?

Recent theoretical developments relating to investment under uncertainty have highlighted the importance of irreversibility for the timing of investment expenditures and their expected returns. This has subsequently stimulated a growing empirical literature which examines uncertainty and threshold effects of investment behaviour. This paper presents a review of this literature. A variety of methods have been used to investigate the empirical implication of irreversibility in investment, the majority focusing on the relationship between investment flows and proxy measures of uncertainty. A general conclusion is that increased uncertainty, at both aggregate and disaggregate levels, leads to lower investment rates. This suggests that there is an irreversibility effect, under which greater uncertainty raises the value of the "option" to delay a commitment to investment. This effect appears to dominate any positive impact on investment arising from the fact that greater uncertainty, under certain circumstances, increases the marginal profitability of capital. The methods used raise a number of issues which call into question the reliability of the findings, and these are addressed in the paper. However, if such irreversibility effects are present, then their omission from traditional investment models casts doubt on the efficacy of such specifications

Review of the quarter's economic trends [July 1976]

The initial recovery phase of the leading economies in the second half of 1975 occurred at a fairly leisurely pace compared to past experience of the upturn. However, the first quarter of 1976 has seen industrial production expanding rapidly in most countries, with an expected rise of 10% over the same period last year. This increases momentum in the world economy has led to revision of official forecasts of many important indicators. The volume of world trade is now expected to rise by 10% this year. Total output, which fell by 1 ½% last year, should increase by 5% this year. Inflation in most countries is now in single figures on an annual rate basis. Profit levels have improved considerably: so far there is little evidence of a recovery in investment in plant and machinery

Econometric Modelling of UK Aggregate Investment: The Role of Profits and Uncertainty

This paper focuses on the determinants of aggregate investment spending in the UK for the industrial and commercial company (ICC) sector. It complements recent work by Cuthbertson and Gasparro (1995), who study an augmented Tobin's q model of investment in the manufacturing sector. Important focal points of our analysis are a role for real profits (internal funds), which allow firms to combat liquidity constraints when access to capital markets is not perfect, Chirinko (1987), and the impact of irreversibility and uncertainty in determining aggregate investment spending. Earlier work on manufacturing investment by Bean (1981a) developed a dynamic, error correction specification based on the flexible accelerator model. Following Cuthbertson and Gasparro we use multivariate cointegration techniques to discover a parsimonious dynamic model, which can explain the 1980s and early 1990s investment experience of the ICC sector. Our results show that a model based on investment and output alone does not cointegrate, and a short-run dynamic model of these variables suffers from heteroscedasticity. This may be consistent with the idea that increased (uncontrolled for) uncertainty has led to increased volatility in investment. The possibility that movements in the real price of gold reflect uncertainty in financial and other traded commodity markets is explored. Investigation of this more general model indicates that real profits and the real price of gold can enhance the explanation of investment spending by the ICC sector

General review [April 1976]

There are now unmistakable signs of a sustained recovery in world trade and production. Both the imports and the exports of the leading industrialised countries in February were substantially above their level of twelve months previously. It may reasonably be expected that world trade as a whole will expand by about 7% in real terms this year Different countries are emerging from the recession at different rates: amongst the first to emerge clearly from the recession has been the United States. In the UK, the fall in total output which began in the fourth quarter of 1974 appears to have ended. Each of the three measures of GDP increased in the fourth quarter of 1975, the output measure by a little over 1/2%. During 1975 real living standards fell by around 4%, despite an increased share of wages and salaries in total money income during the year

Job insecurity and wage outcomes in Britain

In 1996 and 1997, approximately 1 in 10 British workers thought that it was either likely or very likely that they would lose their job within 12 months. Increased job insecurity has been touted as a possible cause for the decline of equilibrium unemployment in Britain and the United States during the 1990s. We investigate whether perceptions of job insecurity contribute to lowering wages. First, we examine the validity of subjective questions about unemployment expectations, using longitudinal data. We find that workers' fears of unemployment are increased by their previous unemployment experience and by other household members' unemployment experiences, and are associated with other objective indicators of insecure jobs. The measure of unemployment fear also helps to predict future unemployment, above and beyond conventional objective variables. We then show that high fear of unemployment is associated with significantly lower wage levels. OLS estimates of the downward impact on average wages of an increase in this expectation by just one half of a standard deviation are approximately 1½ percent. Instrumental variable estimates suggest that 1½ percent is likely to be an underestimate. We conclude that increased job insecurity, relative to aggregate unemployment, has contributed in part to wage restraint in Britain

The Scottish economy [July 1976]

It seems that the level of economic activity in Scotland has passed its nadir, and that a slow recovery is under way. Among the forces stimulating recovery are overseas exports, stockbuilding, and the acceleration of manufacturing production in the rest of the UK. As the recovery gains force one can expect the underlying upward trend in unemployment to level off. Two factors will constrain any reduction in unemployment, however. Firstly, there is the problem, obvious from the July unemployment figures, of the absorption of school leavers into the workforce. There is now a strong case for an extension of the job creation programme to continue to act as a 'buffer' between full-time education and full-time employment. Secondly, further cuts in public expenditure, especially if they occur in housing or construction will to some extent counterbalance any reduction in unemployment through expansion in the private sector

A Survey of Malaria in the British Army in West Africa

Abstract Not Provided

Applications of numerical computation methods in microeconomic theory

The solution of mathematical problems by numerical analysis is a large, intricate subject in its own right, and the substance-of many Ph. D. theses in mathematics. The advancement of numerical analysis and computer technology are clearly not mutually exclusive. Moreover this combination through the growth in computer software facilities is' easily within reach of a researcher with no expertise in either numerical analysis or computer programming. In particular the Numerical Algorithms Group (NAG) based in Oxford provides a library of subroutines for incorporation into source programmes across a broad spectrum of mathematics. The relevance of this development for the economist lies with the considerable scope for providing quantitative evaluations of microeconomic models outside of traditional statistical methods. To justify such a claim the thesis develops a number of applications from microeconomic theory: imperfect information in a non-sequential search framework; optimum tax with endogenous wages; a two sector general equilibrium model of union and non-union wage rate determination; Chamberlin's welfare ideal; and a quantity setting duopoly analysis of the structure conduct performance paradigm. It is hoped that the insights gained from such diverse topics will convince the reader as to the appropriateness of applying numerical computing to microeconomic questions in general, and the usefulness of the NAG software in particular