Firms' investment decisions in response to demand and price uncertainty

Abstract

We investigate the effect of demand and price uncertainty on firms' planned and realized investment from a panel of manufacturing firms. Uncertainty measures are derived from firms' own expectations about demand and prices and firm's sales. We find that demand uncertainty at the time of planning depresses planned and subsequent realized investment. Firms do not revise their plans due to demand uncertainty at the time of spending, suggesting that reducing demand uncertainty will only have lagged effects on investment. We do not find any effect of price uncertainty. Our results are consistent with the behavior of monopolistic firms with irreversible capital.