Time-to-Build and the Inverse U-Shape Investment-Uncertainty Relationship

Abstract

The effect that investment lags have on the uncertainty-investment relationship is studied by modifying the Bar-Ilan and Strange (1996) model to enable an analytical solution. The following results emerge: (i) If the time lag is sufficiently small, uncertainty affects investment negatively; (ii) A sufficiently large time lag gives rise to an inverse U-shape uncertainty-investment relationship; (iii) When such an inverse U-shape exists, the longer the time lag (or the larger the degree of profit convexity), the wider the range of a positive uncertainty-investment relationship.