Details

Related name

• National Bureau of Economic Research [Browse]
• Eberly, Janice C. [Browse]

Series

• Working Paper Series (National Bureau of Economic Research) no. w5363. [More in this series]
• NBER working paper series no. w5363

Summary note

When investment decisions cannot be reversed and returns to capital are uncertain, the firm faces a higher user cost of capital than if it could reverse its decisions. This higher user cost tends to reduce the firm's capital stock. Opposing this effect is the irreversibility constraint itself: when the constraint binds, the firm would like to sell capital but cannot. This effect tends to increase the firm's capital stock. We show that a firm with irreversible investment may have a higher or a lower expected capital stock, even in the long run, compared to an otherwise identical firm with reversible investment. Furthermore, an increase in uncertainty can either increase or decrease the expected long-run capital stock under irreversibility relative to that under reversibility. However, changes in the expected growth rate of demand, the interest rate, the capital share in output, and the price elasticity of demand all have unambiguous effects.

Notes

November 1995.

Source of description

Print version record

Statement on responsible collection description

Princeton University Library aims to describe library materials in a manner that is respectful to the individuals and communities who create, use, and are represented in the collections we manage. Read more...