Irreversible investment under uncertainty: the message in Leasing Expenditures

Abstract

In the present study we initially take stock of the dispersed definitions and measurement methods of irreversibility by offering a bird's eye view of the existing literature. Then we construct a closed-form model to investigate the impact of conditional uncertainty on investment spending under irreversibility by employing leasing penetration rates as an indirect indicator for the degree of irreversibility. Our results support the concept that the investment-uncertainty elasticity varies across leasing rates, and that the overall negative effect of uncertainty on investment decreases monotonically with the degree of reversibility.