Investment in new activities and the welfare cost of uncertainty:
Recent literature has highlighted the importance of new activities in development and growth. It was shown that trade distortions such as tariffs are associated with first-order costs stemming from the induced drop in the formation of new activities. This paper demonstrates that uncertainty may indu...
Gespeichert in:
| 1. Verfasser: | |
|---|---|
| Format: | Buch |
| Sprache: | English |
| Veröffentlicht: |
Cambridge, Mass.
1995
|
| Schriftenreihe: | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series
5041 |
| Schlagworte: | |
| Zusammenfassung: | Recent literature has highlighted the importance of new activities in development and growth. It was shown that trade distortions such as tariffs are associated with first-order costs stemming from the induced drop in the formation of new activities. This paper demonstrates that uncertainty may induce similar costs. This argument is illustrated in the context of Romer's model of a dependent economy, where foreign direct investment is needed to enable the importation of capital goods and intermediate products used in domestic production. The present paper shows that uncertainty acts as an implicit tax on new activities, whose incidence is (in a certain sense) worse than that of a tariff in Romer's framework. As with a tariff, uncertainty inhibits the formation of new activities. Unlike the tariff, however, uncertainty does not benefit the government with revenue. The welfare cost of uncertainty applies also for a closed economy. The paper shows that uncertainty-averse entrepreneurs discount using a 'hurdle rate' that exceeds the risk-free interest rate. The gap between the two rates increases with the uncertainty embodied in the investment, being determined by the vagueness of the information and by the range of possible outcomes. Hence, growth may be inhibited by business uncertainty, where the 'rules of the game' for new activities are vague. |
| Beschreibung: | 18 S. |
Internformat
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| 490 | 1 | |a National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |v 5041 | |
| 520 | |a Recent literature has highlighted the importance of new activities in development and growth. It was shown that trade distortions such as tariffs are associated with first-order costs stemming from the induced drop in the formation of new activities. This paper demonstrates that uncertainty may induce similar costs. This argument is illustrated in the context of Romer's model of a dependent economy, where foreign direct investment is needed to enable the importation of capital goods and intermediate products used in domestic production. The present paper shows that uncertainty acts as an implicit tax on new activities, whose incidence is (in a certain sense) worse than that of a tariff in Romer's framework. As with a tariff, uncertainty inhibits the formation of new activities. Unlike the tariff, however, uncertainty does not benefit the government with revenue. The welfare cost of uncertainty applies also for a closed economy. The paper shows that uncertainty-averse entrepreneurs discount using a 'hurdle rate' that exceeds the risk-free interest rate. The gap between the two rates increases with the uncertainty embodied in the investment, being determined by the vagueness of the information and by the range of possible outcomes. Hence, growth may be inhibited by business uncertainty, where the 'rules of the game' for new activities are vague. | ||
| 650 | 4 | |a Mathematisches Modell | |
| 650 | 4 | |a Wirtschaftsentwicklung | |
| 650 | 4 | |a Economic development |x Mathematical models | |
| 650 | 4 | |a Uncertainty |x Economic aspects |x Mathematical models | |
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| id | DE-604.BV010268156 |
| illustrated | Not Illustrated |
| indexdate | 2024-07-09T17:49:32Z |
| institution | BVB |
| language | English |
| oai_aleph_id | oai:aleph.bib-bvb.de:BVB01-006830247 |
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| physical | 18 S. |
| publishDate | 1995 |
| publishDateSearch | 1995 |
| publishDateSort | 1995 |
| record_format | marc |
| series | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |
| series2 | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |
| spelling | Aizenman, Joshua 1949- Verfasser (DE-588)124080057 aut Investment in new activities and the welfare cost of uncertainty Joshua Aizenman Cambridge, Mass. 1995 18 S. txt rdacontent n rdamedia nc rdacarrier National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series 5041 Recent literature has highlighted the importance of new activities in development and growth. It was shown that trade distortions such as tariffs are associated with first-order costs stemming from the induced drop in the formation of new activities. This paper demonstrates that uncertainty may induce similar costs. This argument is illustrated in the context of Romer's model of a dependent economy, where foreign direct investment is needed to enable the importation of capital goods and intermediate products used in domestic production. The present paper shows that uncertainty acts as an implicit tax on new activities, whose incidence is (in a certain sense) worse than that of a tariff in Romer's framework. As with a tariff, uncertainty inhibits the formation of new activities. Unlike the tariff, however, uncertainty does not benefit the government with revenue. The welfare cost of uncertainty applies also for a closed economy. The paper shows that uncertainty-averse entrepreneurs discount using a 'hurdle rate' that exceeds the risk-free interest rate. The gap between the two rates increases with the uncertainty embodied in the investment, being determined by the vagueness of the information and by the range of possible outcomes. Hence, growth may be inhibited by business uncertainty, where the 'rules of the game' for new activities are vague. Mathematisches Modell Wirtschaftsentwicklung Economic development Mathematical models Uncertainty Economic aspects Mathematical models National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series 5041 (DE-604)BV002801238 5041 |
| spellingShingle | Aizenman, Joshua 1949- Investment in new activities and the welfare cost of uncertainty National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series Mathematisches Modell Wirtschaftsentwicklung Economic development Mathematical models Uncertainty Economic aspects Mathematical models |
| title | Investment in new activities and the welfare cost of uncertainty |
| title_auth | Investment in new activities and the welfare cost of uncertainty |
| title_exact_search | Investment in new activities and the welfare cost of uncertainty |
| title_full | Investment in new activities and the welfare cost of uncertainty Joshua Aizenman |
| title_fullStr | Investment in new activities and the welfare cost of uncertainty Joshua Aizenman |
| title_full_unstemmed | Investment in new activities and the welfare cost of uncertainty Joshua Aizenman |
| title_short | Investment in new activities and the welfare cost of uncertainty |
| title_sort | investment in new activities and the welfare cost of uncertainty |
| topic | Mathematisches Modell Wirtschaftsentwicklung Economic development Mathematical models Uncertainty Economic aspects Mathematical models |
| topic_facet | Mathematisches Modell Wirtschaftsentwicklung Economic development Mathematical models Uncertainty Economic aspects Mathematical models |
| volume_link | (DE-604)BV002801238 |
| work_keys_str_mv | AT aizenmanjoshua investmentinnewactivitiesandthewelfarecostofuncertainty |