Theoretical and Empirical Research of Investment under Uncertainty

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The contributions to the theory of investment under uncertainty made by this research project are as follows :1.In order to investigate the role of uncertainty-aversion, I incorporate the Knightian uncertainty into the stochastic model of investment. As a result, it is shown that an increase in the Knightian uncertainty surely decreases investment while the effect of a mean-preserving spread on investment depends crucially on the level of the Knightian uncertainty.2.In reply to the comment by Saltari and Ticchi (2005) to my previous research (Nakamura,1999), I clearly point out the importance of separating the intertemporal substitutability from the risk-aversion.3.Appealing to the continuous-time version of non-expected utility model, which allows us to investigate the effect of independent changes in intertemporal substitutability from those in risk-aversion, I show that one can easily explain some of unexplainable properties of the investment function using basic economic reasoning.4.Using the analytical method and the numerical simulations by Mathematica, I investigate investment under uncertainty when the lifetime of capital is finite. It becomes clear that investment increases with uncertainty if marginal adjustment costs of investment are large while it decreases with uncertainty if they are small. If the marginal adjustment costs are in between, the investment-uncertainty relationship may be reverse U-shaped.In the empirical investigation, considering the uncertainties over the spreads of new product and technology, I demonstrate that the domestic business fixed investment in Japan remains at its current high level for a while. Although, using the Japanese manufacturing industry data, I have conducted the empirical estimations of the investment functions based on M-GARCH models, in which the uncertainties over demands and prices are considered, no clear results have not yet been derived so far. This is the remaining research in this project.