Wait-and-See: Investment Options under Policy Uncertainty
This paper develops a model of investment decisions in which uncertainty about a one-time change in tax policy induces the firm to temporarily stop investing--to adopt a wait-and-see policy. After the uncertainty is resolved, the firm exploits the tabled projects, generating a temporary investment boom.
An early version of this paper, "Uncertainty and Investment Delays," was given as the Hahn Lecture at the 2012 Royal Economic Society Meetings, at the University of Cambridge. I am grateful to Francesco Caselli, Patrick Kehoe, Robert E. Lucas, Jr., and Juan Pablo Nicolini for helpful comments on several intervening drafts. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.