Optimal Investment under Price and Wage Uncertainty


The effects of future output price uncertainty and wage uncertainty on a firm’s investment decision are examined in this paper, by assuming the competitively risk-neutral firm maximizes the expected value of the sum of discounted cash flows. We find that the optimal investment behavior is such that the expected proportional growth rate of investment is invariant over time, although there exists a tradeoff between the effects of the two uncertainty on firm’s investment because the shift in output price has positive effects on firm’s investment, whereas the shift in wage has negative impacts on firm’s investment. And what’s more important, fluctuations in output price and wage are correlated so that changes in output price tend to be accompanied by changes in wage.

Share and Cite:

J. Huang, "Optimal Investment under Price and Wage Uncertainty," Journal of Mathematical Finance, Vol. 3 No. 1, 2013, pp. 138-144. doi: 10.4236/jmf.2013.31013.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] R. Hartman, “The Effects of Price and Cost Uncertainty on Investment,” Journal of Economic Theory, Vol. 5, No. 2, 1972, pp. 258-266. doi:10.1016/0022-0531(72)90105-6
[2] V. Ghosal and P. Lougani, “The Differential Impact of Uncertainty on Investment in Small and Large Businesses,” Review of Economics and Statistics, Vol. 82, No. 2, 2000, pp. 338-349. doi:10.1162/003465300558722
[3] M.Peeters,“Does Demand and Price Uncertainty Affect Belgian and Spanish Corporate Investment?” Recherches Economiques de Louvain, Vol. 67, No. 3, 2001, pp. 235-255.
[4] P. Temple, G. Urga and C. Driver, “The Influence of Uncertainty on Investment in the UK: A Macro or Micro Phenomenon?” Scottish Journal of Political Economy, Vol. 48, No. 4, 2001, pp. 361-382. doi:10.1111/1467-9485.00204
[5] N. Bloom, “The Impact of Uncertainty Shocks,” Econometrica, Vol. 77, No. 3, 2009, pp. 623-685. doi:10.3982/ECTA6248
[6] J. Lee and K. Shin, “The Role of Variable Input in the Relationship between Investment and Uncertainty,” American Economic Review, Vol. 90, No. 3, 2001, pp. 667-680. doi:10.1257/aer.90.3.667
[7] N. C. Nielsen, “The Price and Output Decisions of the Firm under Uncertainty,” Swedish Journal of Economics, Vol. 77, No. 4, 1975, pp. 459-469. doi:10.2307/3439339
[8] R. E. Lucas and E. C. Prescott, “Investment under Uncertainty,” Econometrica, Vol. 39, No. 5, 1971, pp. 659-681. doi:10.2307/1909571
[9] R. S. Pindyck, “Adjustment Costs, Uncertainty, and the Behavior of the Firm,” American Economic Review, Vol. 72, No. 3, 1982, pp. 415-427.
[10] A. B. Abel, “Optimal Investment under Uncertainty,” American Economic Review, Vol. 73, No. 1, 1983, pp. 228-233.
[11] A. B. Abel and J. C. Eberly, “A Unified Model of Investment under Uncertainty,” American Economic Review, Vol. 84, No. 5, 1994, pp. 1369-1384.
[12] L. Guiso and G. Parigi, “Investment and Demand Uncertainty,” Quarterly Journal of Economics, Vol. 114, No. 1, 1999, pp. 185-227. doi:10.1162/003355399555981
[13] N. Bloom, S. Bond and J. Van-Reenen, “Uncertainty and Investment Dynamics,” Review of Economics Studies, Vol. 74, No. 2, 2007, pp. 391-415. doi:10.1111/j.1467-937X.2007.00426.x
[14] R. Hartman, “Adjustment Costs, Price and Wage Uncertainty, and Investment,” Review of Economic Studies, Vol. 40, No. 2, 1973, pp. 259-267. doi:10.2307/2296652
[15] R. Bachmann, S. Elstner and E. Sims, “Uncertainty and Economic Activity: Evidence from Business Survey Data,” NBER Working Paper, No. 16143, 2010. http://www.nber.org/papers/w16143
[16] N. Bloom, “Uncertainty and the Dynamics of R&D,” American Economic Review, Vol. 97, No. 2, 2007, pp. 250- 255. doi:10.1257/aer.97.2.250
[17] A. Carruth, A. Dickerson and A. Henley, “What Do We Know about Investment under Uncertainty?” Journal of Economic Surveys, Vol. 14, No. 2, 2000, pp. 119-153. doi:10.1111/1467-6419.00107
[18] T. Dunne and X. Y. Mu, “Investment Spikes and Uncertainty in the Petroleum Refining Industry,” Journal of Industrial Economics, Vol. 58, No. 1, 2010, pp. 190-213. doi:10.1111/j.1467-6451.2010.00407.x
[19] J. P. Gould, “Adjustment Costs in the Theory of Investment of the Firm,” Review of Economic Studies, Vol. 35, No. 1, 1968, pp. 47-55. doi:10.2307/2974406
[20] R. Hartman, “Factor Demand with Output Price Uncertainty,” American Economic Review, Vol. 66, No. 4, 1976, pp. 675-681.
[21] M. Kurz and M. Motolese, “Endogenous Uncertainty and Market Volatility,” Journal of Economic Theory, Vol. 17, No. 4, 2001, pp. 497-544.
[22] J. A. List and M. S. Haigh, “Investment under Uncertainty: Testing the Options Model with Professional Traders,” The Review of Economics and Statistics, Vol. 92, No. 4, 2010, pp. 974-984. doi:10.1162/REST_a_00041
[23] R. E. Lucas, “Adjustment Costs and the Theory of Supply,” Journal of Political Economy, Vol. 75, No. 4, 1967, pp. 321-334. doi:10.1086/259289
[24] R. S. Pindyck, “Irreversibility, Uncertainty, and Investment,” Journal of Economic Literature, Vol. 29, No. 3, 1991, pp. 1110-1148.
[25] R. S. Pindyck, “Investments of Uncertain Cost,” Journal of Financial Economics, Vol. 34, No. 1, 1993, pp. 53-76. doi:10.1016/0304-405X(93)90040-I
[26] R. S. Pindyck, “A Note on Competitive Investment under Uncertainty,” American Economic Review, Vol. 83, No. 1, 1993, pp. 273-277.
[27] E. Zabel, “Multiperiod Monopoly under Uncertainty,” Journal of Economic Theory, Vol. 5, No. 3, 1972, pp. 524- 536. doi:10.1016/0022-0531(72)90053-1

Copyright © 2023 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.