Uncertainty, depreciation and industry growth

• Main Authors: SAMAIEGO, Roberto, SUN, Juliana Yu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Uncertainty; Depreciation; Irreversible investmentInvestment; lumpiness; Volatility; Industrial Organization; Macroeconomics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2333; https://ink.library.smu.edu.sg/context/soe_research/article/3332/viewcontent/Uncertainty_depreciation_IG_pv.pdf
• Institution: Singapore Management University

When investment is irreversible, firms invest only when the mismatch between their productivity and their capital stock is large. This suggests that two factors should be related to the frequency of mismatch: volatility and capital depreciation. A canonical model of industry dynamics with investment irreversibility displays slow growth in times of high uncertainty, and decline is particularly pronounced in industries where capital depreciation is rapid. A differences-in-differences regression using industry growth data from a large sample of countries supports this result.