This paper uses a simple model to explore the effects of "increasing demand risk" on business fixed investment. We show that within a putty-clay 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.
Working Paper No. 20
A Putty-Clay Model of Demand Uncertainty and Investment
Working Paper
Reference
Albrecht, James W. and Albert G. Hart (1979). “A Putty-Clay Model of Demand Uncertainty and Investment”. IFN Working Paper No. 20. Stockholm: Research Institute of Industrial Economics (IFN).
Albrecht, James W. and Albert G. Hart (1979). “A Putty-Clay Model of Demand Uncertainty and Investment”. IFN Working Paper No. 20. Stockholm: Research Institute of Industrial Economics (IFN).
Authors
James W. Albrecht, Albert G. Hart