Testing Uncertainty's Effect in Real Options with Multiple Capital Goods

The irreversible investment theory with heterogeneous capital predicts a negative relationship between uncertainty and the investment extensive margin. We empirically explore this prediction using plant-level data for investment across multiple fixed assets, and employ a discrete ordered choice model. Our results indicate that uncertainty, even after controlling for financial constraints, induces a negative effect on the extensive margin, thereby decreasing the likelihood of investment triggering in more types of capital. This effect takes the form of both a higher probability of investment inactivity but also a lower probability of investment triggering in a higher number of capital types

Capital (architecture) · Capital formation · Capital good · Capital investment · Econometrics · Economics · Financial capital · Fixed investment · Investment (military) · Margin (machine learning) · Microeconomics · Monetary economics · Public good · Capital Investment and Risk Analysis · Computer Science · Economic theories and models · Finance · Market Dynamics and Volatility

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