Investment decisions in manufacturing: assessing the effects of real oil prices and their uncertainty
Article first published online: 10 AUG 2012
Copyright © 2012 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 28, Issue 1, pages 151–165, January/February 2013
How to Cite
Drakos, K. and Konstantinou, P. Th. (2013), Investment decisions in manufacturing: assessing the effects of real oil prices and their uncertainty. J. Appl. Econ., 28: 151–165. doi: 10.1002/jae.2297
- Issue published online: 21 JAN 2013
- Article first published online: 10 AUG 2012
- Manuscript Revised: 23 APR 2012
- Manuscript Received: 10 AUG 2008
We investigate the effects of real oil prices and their uncertainty on investment decisions. Making use of plant-level data, we estimate dynamic, discrete-choice models that allow modeling investment inaction, under different assumptions related to initial conditions and unobserved heterogeneity. We find that increases in real oil price changes and in real oil price uncertainty significantly reduce the likelihood of investment action, in line with the predictions of irreversible investment theory. We also document that investment decisions exhibit strong, pure state dependence and are also significantly affected by initial conditions. Copyright © 2012 John Wiley & Sons, Ltd.