Irreversibility Investment Behavior Under Uncertainty

In this paper, we show that even without the irreversibility of investment, increased output demand uncertainty may decrease investment under perfect competition. Furthermore, output demand uncertainty never affects investment if the industry faces a perfectly inelastic labor supply schedule. We also show that neither the strictly convex adjustment costs not the irreversibility of investment are needed for bounded investment. When in equilibrium, we find that changes of parameter will bring corresponding movement in investment. Moreover, we consider the impact of tax policy uncertainty on firm level and aggregate investment, comparing investment behavior when uncertainty is due to a shock following Geometric Brownian Motion(GBM) versus when random discrete jumps in a tax policy occur. Expectations of the likelihood of a tax policy switch have an important negative impact on the gain to delaying investment in the latter model and time to investment can fall with increasing tax policy uncertainty. Aggregate investment simulations indicated that capital formation is adversely affected by increases in uncertainty in the traditional GBM model but can be enhanced in the jump process model.