The effects of irreversibility and uncertainty on capital accumulation

Andrew B. Abel, Janice C. Eberly*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

101 Scopus citations

Abstract

Irreversibility and uncertainty increase the user cost of capital which tends to reduce the capital stock. Working in the opposite direction is a hangover effect, which arises because irreversibility prevents the firm from selling capital even when the marginal revenue product of capital is low. Neither the user cost effect nor the hangover effect dominates globally, so that irreversibility may increase or decrease capital accumulation. Furthermore, an increase in uncertainty can either increase or decrease the long-run capital stock under irreversibility relative to that under reversibility. Other effects that we consider, however, have unambiguous effects on long-run capital accumulation.

Original languageEnglish (US)
Pages (from-to)339-377
Number of pages39
JournalJournal of Monetary Economics
Volume44
Issue number3
DOIs
StatePublished - Dec 1999

Keywords

  • Investment
  • Irreversibility
  • Uncertainty

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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