Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/90854
Authors: 
Bloom, Nicholas
Year of Publication: 
2000
Series/Report no.: 
IFS Working Papers W00/15
Abstract: 
This paper shows that, contrary to common beliefs, the real options effect of uncertainty plays no role in the long run rate of investment. This is proven for both the standard investment model with Cobb-Douglas production and Brownian motion demand, and also for a broader class of models with multiple lines of capital, labor and general demand stochastics. Real options and irreversibility, however, are shown to play an important role in the short run dynamics of investment and labor demand. Specifically, they reduce the short run response of investment and hiring to current demand shocks, and lead to a lagged response to past demand shocks.
JEL: 
D92
E22
D8
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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