A Putty–Clay Model of Demand Uncertainty and Investment

A simple model is lIsed to explore the etTects of "inereasing demand risk" on busine~s fixed investment. We show that within a putty-c1ay framework an increase in demand uncertAinty can be expected to have two countervailing effects. On the one hand increasing risk tends to induce a firm to increase its capacity. but on the other hand the optimal capital-intensity of that capacity decreases.