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Investment–uncertainty relationship: differences between intangible and physical capital

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This paper disentangles the effects of uncertainty in explaining the heterogeneity of firms’ investments. In particular, following Bloom [2007. “Uncertainty and the Dynamics of R&D.” American Economic Review 97 (2): 250–255], we test the role of uncertainty and liquidity constraints extending the model to include R&D, non-R&D intangibles, as well as physical capital. The analysis is performed on a large data set of Italian firms, covering both manufacturing and services sectors, as well as large and small firms. We show that non-convex adjustment costs affect different capital inputs in different ways, depending on their degree of firm-specificity. The results confirm the Bloom model: flow adjustment costs explain investment in R&D and, to a lesser extent, in non-R&D intangibles. However, it struggles to explain tangible investment plans because of the ambiguous effect of the stock adjustment costs.
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Keywords: C3; C5; D22; D92; E22; E32; G32; Investment; L26; O3; R&D; SMEs; buildings; financial constraints; irreversibility; machinery; non-R&D intangibles; panel data econometrics; uncertainty

Document Type: Research Article

Affiliations: Department of Economics, University of Bologna, Strada Maggiore 45, 40125, Bologna, Italy

Publication date: April 2, 2016

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