Pursuing the wrong options? Adjustment costs and the relationship between uncertainty and capital accumulation

Abel and Eberly (1999) prove that uncertainty has an ambiguous effect on long run capital accumulation in a real options model. We show that, with adjustment costs quadratic in investment, more uncertainty reduces capital and this effect may be large.

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Year of publication:	2011
Authors:	Bond, Stephen R. ; Söderbom, Måns ; Wu, Guiying
Published in:	Economics Letters. - Elsevier, ISSN 0165-1765. - Vol. 111.2011, 3, p. 249-251
Publisher:	Elsevier
Keywords:	Uncertainty Real options Adjustment costs Capital accumulation

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Type of publication:	Article
Source:	RePEc - Research Papers in Economics

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