Abstract
Motivated by Lee and Shin (2000, AER), we study the interplay of the share of variable input, investment irreversibility, and market power in shaping the relationship between investment and uncertainty. Employing a large panel of Chinese manufacturing firms, combined with industry-specific exchange rates for the period 1998–2006, our system Generalized Method of Moments (GMM) estimation finds that uncertainty significantly encourages (discourages) investment for firms with high (low) labor share or low (high) investment irreversibility, and the impact is magnified for firms with low market power. Our paper demonstrates the importance of the share of variable input, investment irreversibility, and market power in the Hartman–Abel paradoxical effect that predicts a positive relationship between uncertainty and investment in the international economics context.
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