Additive and multiplicative uncertainty revisited: what explains the contrasting biases?

This note addresses the reasons why additive and multiplicative demand uncertainty produce differently signed biases in output price as compared to the certainty case in two-period monopoly models. Although the result is known in the literature different papers tend to assume one or other model without discussion, possibly because the result has hitherto been unexplained. This note gives an intuitive explanation for the result after first presenting a parsimonious review of the two models. We also discuss which, if either, of the two models is more realistic.

Production Constraints and the NAIRU

This paper argues that the production constraints in the basic NAIRU model should be distinguished by type: capital constraints and labour constraints. It notes the failure to incorporate this phenomenon in standard macro models. Using panel data for UK manufacturing over 80 quarters we show that capital constraints became relatively more important during the 1980s as industry failed to match the increase in labour flexibility with rising capital investment

Governance, Strategy, and Investment: Evidence from Hurdle Rates

This paper uses direct evidence from reported hurdle rates and discount rates to assess theories of corporate investment appraisal. We find first that hurdle rates are frequently below discount rates, suggesting strategic or managerial behaviour. To test this we use probit analysis to discriminate between this group and an alternative group, where hurdle rates are higher than discount rates. We find that variables representing the opportunity for managerial or strategic investment (e.g. free cash flow) or the motivation (e.g. low growth) increase the probability of firms having hurdle rates below discount rates. In a second stage of the analysis we analyse the relationship between hurdle rates and discount rates for both sets of firms separately. For example, we find that for the strategist firms, product R&D tends to be associated with a lower hurdle rate relative to the discount rate, while for the profit maximising group of firms, the opposite is the case. For the second sample, we also find that risk variables raise the hurdle and that there is some evidence for an irreversibility effect. Responses of the hurdle rate to entry also differ between the two groups.

Advertising's Elusive Economic Rationale: Public Policy and Taxation

Advertising and its effects have been debated for well over a century. In the last fewdecades a generally sceptical view of the benefits of advertising has been overturned by a series ofacademic advances in economics that detail a variety of ways in which advertising may affect theeconomy and society. This academic work has however been paralleled by a growing popular andpolitical opposition to advertising and its social effects. In this paper, the positive economic case foradvertising is challenged by an assessment of the main channels of its influence and by a review ofthe associated empirical findings on its economic and wider impact. A policy response of limitingthe tax deductibility of business advertising is explored

Investment, growth and government policy in an economy characterised by oligopolistic and competitive sectors

This thesis investigates the theoretical coherence and empirical validity (in the UK context) of the economic school whose main proponent is Alfred Eichner. The main questions addressed concern (1) the duality of pricing, savings and investment behaviour between competitive and oligopolistic sectors and (2) the implications of the cyclical financial surplus that emerges in the oligopolistic sector during the upturn. The cycle is explained as the outcome of government reaction to the consequences of this financial surplus, rather than as a reaction to capacity or trade constraints. The thesis investigates the role and effectiveness of policy instruments aimed at strengthening and prolonging the cyclical upswing so as to achieve an upward revision to the secular growth rate. The thesis makes original contributions by extending the formal treatment of the effect of the oligopolistic financial surplus. It also locates the theory in its historical theoretical context and demonstrates that it can apply also to the case of an open economy. It collates evidence on capacity and trade constraints on the UK economy to support the argument that they do not constitute sufficient reasons for government deflationary action. The duality of the UK economy is demonstrated in respect of pricing behaviour by collating the results of existing studies. Duality in respect of savings and investment behaviour is confirmed by an original study of Company Accounts data. Investment duality is confirmed as a by-product of two further studies which have the main aim of establishing that traditional investment-directed instruments are not effective in the short-run ( -for the oligopolistic sector and thus cannot be relied on to reduce its financial surplus. These studies are supplemented by a survey of existing literature on investment. Finally, the role of heterodox policy instruments in prolonging a cyclical upswing is examined in the context of the theoretical approach adopted

A real stake for workers

Inclusive ownership funds have been promoted by many on the left as a way of giving employees more say in the way businesses are run. But is there a better means to a fairer end

Profitability, Capacity, and Uncertainty: A Robust Model of UK Manufacturing Investment

This paper uses a model of capital investment that ascribes a theoretical role to profitability and uncertainty in determining the capital-output ratio. Empirical implementation uses quarterly data from UK manufacturing over a thirty-year period, and unique co-integrating relationships are obtained for two asset classes: buildings and plant and machinery. The corresponding dynamic equations are also well specified. Non-nested testing shows that the performance of the estimated investment models ranks similarly to the performance of predictions from direct investment intentions.

Contrasts Between Classes of Assets in Fixed Investment Equations as a Way of Testing Real Option Theory

This paper tests the power of real options theory to explain investment under uncertainty, exploiting differences in the degree of irreversibility between machinery and buildings. It reports estimates of investment equations for each asset class using a large sample of UK manufacturing industries, with results that are consistent with the predictions of real options theory. Additionally, using a specially constructed industryspecific measure of irreversibility for machinery investment, the paper provides further confirmation of the empirical relevance of real options.Investment, Irreversibility, Real Options, Uncertainty, Panel Data

Explaining the Diversity of Industry Investment Responses to Uncertainty Using Long Run Panel Survey Data

This paper presents an empirical study of the channels of influence from uncertainty to fixed investment suggested by real options theory. Using panel data from the Confederation of British Industry (CBI) Industrial Trends Survey, we report OLS estimates of the impact of uncertainty on investment where the regressors are augmented by cross-sectional averages of the dependent variable and of the individual specific regressors, as recently suggested by Pesaran (2004). The cross-industry pattern of results is checked for consistency with the pattern predicted by real options theory, using a specially constructed data set of industrial characteristics. We find that irreversibility is able to predict the pattern detected, but only when combined with a measure of the information advantage of delay. There is also evidence for expansion options effects; industries with high R&D and advertising intensities tend to have positive uncertainty effects.Investment, Industry, Irreversibility, Real Options, Uncertainty