TY  - JOUR
AU  - Abel,Andrew B.
AU  - Eberly,Janice C.
TI  - The Effects of Irreversibility and Uncertainty on Capital Accumulation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5363
PY  - 1995
Y2  - November 1995
UR  - http://www.nber.org/papers/w5363
L1  - http://www.nber.org/papers/w5363.pdf
N1  - Author contact info:
Andrew B. Abel
Wharton School
University of Pennsylvania
2315 Steinberg Hall - Dietrich Hall
Philadelphia, PA  19104-6367
Tel: 215/898-4801
Fax: 215/573-7244
E-Mail: abel@wharton.upenn.edu

Janice C. Eberly
Northwestern University
Department of Finance
Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/467-1840
Fax: 847/491-5719
E-Mail: eberly@kellogg.northwestern.edu
AB  - When investment decisions cannot be reversed and returns to capital are uncertain, the firm faces a higher user cost of capital than if it could reverse its decisions.  This higher user cost tends to reduce the firm's capital stock.  Opposing this effect is the irreversibility constraint itself: when the constraint binds, the firm would like to sell capital but cannot.  This effect tends to increase the firm's capital stock.  We show that a firm with irreversible investment may have a higher or a lower expected capital stock, even in the long run, compared to an otherwise identical firm with reversible investment.  Furthermore, an increase in uncertainty can either increase or decrease the expected long-run capital stock under irreversibility relative to that under reversibility.  However, changes in the expected growth rate of demand, the interest rate, the capital share in output, and the price elasticity of demand all have unambiguous effects.
ER  -