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Theoretical models of investment under uncertainty predict that the sign and the strength of the investment-uncertainty relationship is in principle ambiguous and can vary greatly across groups of firms depending on the degree of irreversibility of investment and the market power of the firm. This paper investigates the effects of uncertainty on the investment decisions of a sample of Italian manufacturing firms, using information on the subjective probability distribution of future demand for firms’ products according to entrepreneurs. The results support the view that uncertainty slows down capital accumulation. Consistent with the predictions of the theory, there is considerable heterogeneity in the effect of uncertainty on investment: it is stronger for firms that cannot easily reverse investment decisions and for those with substantial market power. We show that the negative effect of uncertainty on investment cannot be explained by uncertainty proxying for liquidity constraints, credit rationing being more likely among riskier firms. Evidence of a negative effect of past uncertainty on hours currently worked reinforces the conclusion of a negative relationship between uncertainty and investment.

Capital investment decisions must recognize the limitations on the firm's ability later to sell off or expand capacity. This paper shows how opportunities for future expansion or contraction can be valued as options, how this valuation relates to the q-theory of investment, and how these options affect the incentive to invest. Generally, the option to expand reduces the incentive to invest, while the option to disinvest raises it. We show how these options interact to determine the effect of uncertainty on investment, how these option values change in response to shifts of the distribution of future profitability, and how the q-theory and option pricing approaches to investment are related.

This paper shows that when uncertainty is taken into account explicitly, taxation of corporate income can leave corporate investment incentives, and individual savings incentives, basically unaffected, in spite of the sizable tax revenues collected. In some plausible situations, such taxes can increase efficiency. The explanation for these surprising results is that the government, by taxing capital income, absorbs a certain fraction of both the expected return and the uncertainty in the return. While investors as a result receive a lower expected return, they also bear less risk when they invest, and these two effects are largely offsetting.

Bankers' screening devices are identified to determine firms' probability of borrowing in the 'formal' segment of the capital market in Pakistan. Incorporating this information, investment functions are estimated using a two stage switching regressions model with endogenous switching. It is concluded that firms that borrow in the 'formal' markets behave according to the flexible accelerator model of investment while non-borrowing firms plough back profits. Furthermore, the former have higher capital-output ratios and find it less difficult to adjust to their desired capital stocks compared to the latter. Investment determinants related to entrepreneurial and firm features are also identified.

I. Introduction, 399.—II. Asset prices in a mixed economy, 401—III. Optimal levels of investment in a mixed economy, 403.—IV. Conclusion, 408.

The marginal rate of return on public investment in a tax-distorted economy is a weighted average of the marginal social productivity of capital in the private sector and the marginal social rate of time preference, but the weights are shown to depend not only on the proportions of funding obtained from each source through incremental borrowing but also on the degree of complementarity or substitutability between public and private investment.

The identity of capital and capital goods: is it admitted by Professor Clark? 28–34.—A difference as to knowing the existence and finding the explanation of the return on capital, 34–40.—A question of method: shall a theory of distribution confine itself to the present, or must it reach back to the past? 40–45.—The synchronizing effect of "capital" considered once more, 45–47.

Introduction, 295. — I. Increasing eosts and the distribution of earnings, 296. — II. Increasing costs and the rate of return, 299. — III. Implications and conclusions, 301.

The report expands a previously reported viewpoint and presents some further empirical evidence about risk, other influences on profits and average rates of return. (Author)

The basis of investment pessimism, 549. — The new view, 551. — A simple model of growth, 553. — Investment and productivity in the long run, 555. — Investment and productivity in the short run, 560. — The rate of return on current investment, 563.— Summary, 567.