Cover IMF Working Papers
Investment, Uncertainty, and Irreversibility in Ghana
Author: Ms. Catherine A Pattillo
Series:
IMF Working Papers
Volume/Issue:
Volume 1997: Issue 169
Language:
English
Publication Date:
01 Dec 1997
DOI:
https://doi.org/10.5089/9781451858303.001
ISBN:
9781451858303
ISSN:
1018-5941
Pages:
37
Keywords:
WP; investment trigger; capital stock; cost of capital; investment; uncertainty; irreversible; Ghana; firm investment model; hurdle level; uncertainty variable; firm owner; Manufacturing; Stocks; Private investment; Probit models; Capital adequacy requirements
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Panel data on Ghanaian manufacturing firms are used to test predictions from models of irreversible investment under uncertainty. Information on the entrepreneur’s subjective probability distribution over future demand for the firm’s products is used to construct the expected variance of demand, which is used as a measure of uncertainty. Empirical results support the prediction that firms wait to invest until the marginal revenue product of capital reaches a firm-specific hurdle level. Moreover, higher uncertainty raises the hurdle level that triggers investment, and uncertainty has a negative effect on investment levels that is greater for firms with more irreversible investment.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund