Date of Award

6-2009

Document Type

Union College Only

Degree Name

Bachelor of Arts

Department

Economics

First Advisor

Eshragh Motahar

Language

English

Keywords

investment, uncertainty, relationship, linear, states

Abstract

This thesis focuses on the role of uncertainty in investment decisions. For years, many economists defended a strong negative linear relationship between uncertainty and investment. In the simplest terms, the higher the risk of an investment the lower the level of investment. However, mathematical tools allow us to better analyze the effects of uncertainty. We hypothesize that the relationship between uncertainty and investment in the United States is non-linear. Dixit and Pindyck (1994) laid the theoretical groundwork for the nonlinear relationship between investment and uncertainty. They find that, rather than a linear relationship, there exists an “inverse U” shaped relationship. They did not use an empirical model, leaving a gap in the research on investment and uncertainty. Having both a linear and quadratic component of uncertainty allows us to empirically investigate the non-linearity of this relationship. Our contribution to the field is to use the theoretical work by Dixit and Pindyck and the empirical work of Bo and Lensink (2003) to create a model which captures the role of uncertainty in aggregate investment in the United States. We find that a nonlinear relationship between uncertainty and aggregate fixed private domestic investment in the United States does indeed exist in certain time periods during 1947-2007.

Download
Off-Campus Download

Share

COinS