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The Impact of Market Structure and Irreversibility on Investment under Uncertainty: An Empirical Analysis

Lookup NU author(s): Dr Sara MaioliORCiD

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Abstract

The empirical literature of investment under uncertainty has vastly neglected to account for the role played by market structure. Recently the theory has however started to merge real options theory with game theory to offer alternative explanations to strategic investment behaviour. This paper estimates an error correction model of investment under product price uncertainty for 23 French industries during the period 1977-1997 and represents the first empirical work that includes variables of market structure (in terms of degree of competition) in a model of investment under uncertainty. It is also one of the very first attempts to make explicit the empirical relationship between investment and uncertainty under different degrees of irreversibility. Although I find evidence that in general uncertainty has a negative impact on investment, the results show that the more concentrated industries are not significantly affected. Irreversibility, as predicted by theory, has a significant negative impact on investment, but when degree of competition and irreversibility are considered together it appears that the more concentrated industries can shield from the negative impact of uncertainty notwithstanding the presence of downward adjustment costs of capital. This seems in line with some of the recent developments proposed by the theory.


Publication metadata

Author(s): Maioli S

Publication type: Report

Publication status: Published

Series Title: Working Paper Series

Type: GEP Research Paper

Year: 2005

Source Publication Date: 18-12-2005

Report Number: 2005/45

Institution: GEP, University of Nottingham

Place Published: Nottingham

URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=870239

Notes: Cited also in the EWI (Economics Web Institute) website at http://www.economicswebinstitute.org/essays.htm http://www.economicswebinstitute.org/industrialdynamics.htm


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