TY - JOUR
AU - Hall, Robert E
TI - Investment Under Uncertainty: Theory and Tests with Industry Data
JF - National Bureau of Economic Research Working Paper Series
VL - No. 2264
PY - 1987
Y2 - May 1987
DO - 10.3386/w2264
UR - http://www.nber.org/papers/w2264
L1 - http://www.nber.org/papers/w2264.pdf
N1 - Author contact info:
Robert E. Hall
Hoover Institution
Stanford University
Stanford, CA 94305-6010
Tel: 650/723-2215
E-Mail: rehall@gmail.com
AB - Under the assumption of constant returns to scale, there is a very simple, easily testable condition for optimal investment under uncertainty. Application of the test requires no parametric assumptions about technology and no assumptions about the competitiveness of the output market. The condition is that the expected marginal revenue product of labor equal the expected rental price of capital. The condition implies a certain invariance property for a modified version of Solow's productivity residual. Tests of the invariance property for U.S. industry data give very strong rejection in quite a few industries. The interpretation of rejection is either that the technology has increasing returns (possibly because of fixed costs) or that fins systematically over-invest.
ER -