Uncertainty, investment, and industry evolution
Name
35719473.pdf
Size
1.59 MB
Format
Adobe PDF
Checksum (MD5)
115dc9fb56d16378faf7ef5ff697333a
Author(s)
Caballero, Ricardo J.
Pindyck, Robert S.
Date Issued
1992
Publisher
MIT Center for Energy and Environmental Policy Research
Series/Report no.
MIT-CEEPR (Series) ; 92-009WP.
Abstract
We study the effects of aggregate and idiosyncratic uncertainty on the entry of firms, total investment, and prices in a competitive industry with irreversible investment. We first use standard dynamic programming methods to determine firms' entry decisions, and we describe the resulting industry equilibrium and its characteristics, emphasizing the effects of different sources of uncertainty. We then show how the conditional distribution of prices can be used as an alternative means of determining and understanding the behavior of firms and the resulting industry equilibrium. Finally, we use four-digit U.S. manufacturing data to examine some implications of the model.
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