No better time than now: Future uncertainty and private investment under dictatorship

Despite received wisdom that long time horizons and formal institutions can induce private investment under dictatorship, there is substantial investment even in relatively unconstrained regimes. This paper provides a novel explanation for the puzzle of investment in these regimes: economic elites’ uncertainty over expected investment returns under plausible alternative authoritarian successors. We construct a noisy signaling model that captures how uncertainty over which type of authoritarian successor will rule next and uncertainty in the truthfulness of policy promises made by potential autocratic successors might provide incentives for elite investment.     

Precaution under mixed uncertainty: Implications for environmental management

A model of pollution control subject to two types of uncertainty is presented. First, the natural decay of the pollution stock follows stochastic dynamics that drives a diffusion pollution process (“stochastic uncertainty”). Moreover, the damage coefficient which determines the amount of damage corresponding to each pollution stock can undergo an abrupt increase at some uncertain future time (“event uncertainty”). The model admits an explicit and simple dynamic characterization of the optimal emission rule and the ensuing pollution process. When only one type of uncertainty is permitted (by setting either the variance of the stochastic process or the hazard rate for the damage increase to zero) it acts to promote the intuitive response of precaution. However, allowing the two types to interact gives rise to a non-monotonic behavior, whereby increasing the stochastic variance first enhances, then diminishes the response to the hazard. The results confirm and expand recent findings based on discrete-time formulations.     

A new model for decisions under uncertainty

A representation for preferences between uncertain acts that is not unduly more complex than the Ramsey-Savage model can simultaneously accomodate Allais's paradox, Ellsberg's paradox, preference reversals and cyclic preferences.     

On the investment sensitivity of debt under uncertainty

We investigate the impact of debt on a panel of U.S. manufacturing firms' capital investment behavior as the underlying firm-specific and market-level uncertainty changes. Our estimates show that the influence of leverage on capital investment may be stimulating or mitigating depending on the effects of uncertainty.     

Expectations and intertemporal separability in an empirical model of consumption and investment under uncertainty

An intertemporal model of consumption and investment under uncertainty is formulated, and compared with the existing literature; it is argued that an assumption of myopia is necessary for its empirical applicability. It is estimated by maximum likelihood with quarterly British data. A specification search for a satisfactory form of expectations is made, and the estimated model is compared with a static demand system. Strong intertemporal separability is formulated as a nested hypothesis, and strongly rejected by a likelihood ratio test.     

Competition schemes and investment in network infrastructure under uncertainty

This paper compares two specific types of competition schemes—service-based and facility-based competition—by focusing on a firm’s incentive to invest in network infrastructure. We show that when monopoly rent is large, facility-based competition means that the initial introduction of infrastructure is made earlier than under service-based competition. However, when monopoly rent and the degree of uncertainty are both small, service-based competition brings about the earlier initial introduction of infrastructure than facility-based competition. The paper includes discussion of the policy implications of these findings.      

Tax competition for foreign direct investment under information uncertainty

The relation between taxation states and foreign direct investment (FDI) has been studied from several perspectives and with states at different levels of development. Most previous studies, however, have only considered the impact of tax level on FDI volume. This paper enhances this view by assuming that multinational enterprises (MNEs) can use transfer prices systems and have investment timing flexibility. Thus, it evaluates the impact of the use of international transfer pricing systems on state policy and on the investment timings of MNEs. In uncertain business environments (with the periodic releases of news), investment can increase if MNEs delay investment decisions. This paper shows how tax differentials can attract FDI and can influence MNE behavior. The equilibrium is set in a global environment where MNEs can shift their profits between states depending on local corporate tax rates. Assuming the use of transfer pricing schemes, this paper confirms the relationship between MNE behavior and the release of business news.     

The choice and timing of foreign direct investment under uncertainty

This paper sheds new light on why timing and entry mode should be considered simultaneously in the international investment literature. We derive the profit levels at which it is optimal to switch from exporting to setting up a wholly owned subsidiary, creating a joint venture, or licensing production to a local firm. The preferred entry mode depends on uncertainty about future profits, tax differentials between the home and the foreign country, the cost advantages of local firms, institutional requirements, and the degree of cooperation between partners in a joint venture.     

Sustained output growth under uncertainty: A simple model with human capital

In a model where agents use their labour/education choice to adjust their consumption profile over time, I show that the impact of uncertainty on growth depends, critically, on agents’ attitudes towards risk, reflected by the coefficient of relative risk aversion. In this respect, the well known result from the literature on ‘saving under uncertainty’ can be extended into a broader context, whereby the intertemporal profile of consumption is determined via human capital accumulation rather than saving and physical capital investment.     

Endogenous timing in a mixed oligopoly under demand uncertainty

This paper analyzes a Hotelling-type game in a mixed oligopoly, where firms can either enter the market in period 1, facing demand uncertainty, or postpone their entry, in order to acquire complete information. It is shown that, for a high (low) level of uncertainty, there is a pure (mixed)-strategy equilibrium. Moreover, the standard result in the literature—that uncertainty is a differentiation force, is only possible when the degree of uncertainty is small. An increase in the degree of uncertainty could force firms to delay their entry and lead to a socially optimal outcome.     

Private investment with social benefits under uncertainty: The dark side of public financing

We develop a game‐theoretic model of private–public contribution to a long‐term project with sequential actions and moral hazard. A private agent is one who is in charge of both the financial contribution and the management effort, these two actions entailing private costs and uncertain ex‐post private and social benefits. A public agent is one who decides the amount of public funding to this quasi‐public good, knowing that the size and the probability of attaining a surplus ex post depend on the private agent's effort. We consider four public‐funding scenarios: benefit‐sharing versus cost‐sharing crossed with ex‐ante versus ex‐interim government intervention. We test our theoretical predictions by means of an experiment that confirms the main result of the model: Cost‐sharing public intervention is more effective than benefit‐sharing in boosting private financial contribution to the project. Furthermore, when public intervention comes after private contribution ( ex‐interim government intervention), both public‐funding scenarios have a negative impact on the private management effort. In our model, the latter result is explained by the private agent's high degree of risk aversion. These results have policy implications for strategic investments with long‐term social consequences. In deciding the optimal timing and method of the contribution, governments should also consider the indirect effects on agents’ long‐term management efforts.     

Lifetime consumption and investment: Retirement and constrained borrowing

Retirement flexibility and inability to borrow against future labor income can significantly affect optimal consumption and investment. With voluntary retirement, there exists an optimal wealth-to-wage ratio threshold for retirement and human capital correlates negatively with the stock market even when wages have zero or slightly positive market risk exposure. Consequently, investors optimally invest more in the stock market than without retirement flexibility. Both consumption and portfolio choice jump at the endogenous retirement date. The inability to borrow limits hedging and reduces the value of labor income, the wealth-to-wage ratio threshold for retirement, and the stock investment.     

A managerial model of investment: overlooked alternatives

The long-run purchasing power parity (PPP) hypothesis is tested for nine bilateral sterling exchange rates, using recently developed techniques on cointegration and seasonal integration. The empirical findings show that none of the exchange rates and relative prices contain seasonal unit roots, but all have an autoregressive unit root. The cointegration tests overwhelmingly reject the PPP hypothesis as a long-run equilibrium condition for all countries concerned.     

Fiber investment and access under uncertainty: long-term contracts,risk premia,and access options

Journal of Regulatory Economics - Regulated access schemes shape incentives for both investment and entry in next-generation networks. We study in a general duopoly setting whether and how risk...     

Modelling investment and disinvestment decisions under competition,uncertainty and different market interventions

A real options market model is developed, which derives the firms' optimal investment and disinvestment thresholds simultaneously in a competitive environment. It combines genetic algorithms and stochastic simulation, whereby vast modelling flexibility is gained. For example, different market interventions can be integrated and their effects on the firms' investment behaviour and the sectoral welfare can be assessed. The model is validated for its application to competitive markets by numerically replicating the optimality property of myopic planning. According to the results, production ceilings and investment subsidies are preferable to price floors because the welfare is less reduced for a given stimulation of the willingness to invest. Moreover, it is shown that not considering disinvestment options, which in reality often exist, can lead to incorrect valuations of investment strategies at firm level and incorrect policy impact analyses at macroeconomic level.     

Location decisions under uncertainty and the urban model

This letter uses a simple urban model to analyze the impact of random transportation costs on residential location decisions of households. It is shown that such uncertainty steepens the fall of land prices with distance from the CBD and can, in a specific example, cause an increase in optimal city size.     

A general equilibrium model of the incidence of corporation income tax under uncertainty

In this paper we investigate the incidence of the corporation income tax in terms of a two-sector, general equilibrium model, where production decisions are made under uncertainty. The conventional result, derived originally by Harberger (1962), is that if the corporate sector is the capital-intensive sector, then capital must bear a greater burden of the tax, in proportion to its initial share in national income, than labor. This result continues to hold unambiguously under uncertainty only if the relative and the absolute risk aversion of the corporations are non- increasing in profits. Otherwise, the Harberger result may not hold.     

A Q-theory model with lumpy investment

We present an analytically tractable dynamic stochastic general equilibrium model that incorporates micro-level fixed and convex adjustment costs. We provide an explicit characterization of equilibrium dynamics by a system of nonlinear stochastic difference equations. We provide general conditions under which our model features investment lumpiness at the microeconomic level, but aggregate dynamics are isomorphic to those in a Q-theory model without fixed costs. This theoretical result is independent of the specification of the fixed cost distribution and also holds true when firms face persistent idiosyncratic productivity shocks.     

Robust monetary policy under model uncertainty and inflation persistence

In this paper, we examine the inflation persistence puzzle by applying the robust control approach of Hansen and Sargent (2008). In line with the literature suggesting that inflation persistence may be affected by the monetary policy design and its institutional characteristics, we find that inflation persistence is positively related to the central bank's preference for model robustness. In effect, model uncertainty and robust decision making may be considered as a mechanism generating inflation persistence, for a given non-zero degree of autocorrelation in supply-side shocks. Further, the policy implication is that the central bank's monetary policy under model uncertainty renders, in terms of the sacrifice ratio, the output-cost of inflation stabilization more important.