Irreversible investment, uncertainty and hysteresis: A New Zealand investigation

Abstract

Irreversible investment theory suggests both that uncertainty has a negative effect on investment and that sunk costs can generate hysteresis by creating a gap between the investment/abandonment triggers. We investigate uncertainty's empirical role using a novel entropy‐related measure from business survey data. The coefficient on uncertainty is significantly negative and tentative signs of misspecification are removed.

Notes

Garlick & Co. Ltd, Wellington.