Richard Hartman

The effects of price and cost uncertainty on investment

Abstract This paper examines the effects that increased uncertainty in future output prices, wage rates, and investment costs has on the quantity of investment undertaken by a firm. It is assumed that the firm maximizes the expected value of the sum of discounted cash flows, that the production function is homogeneous of degree one, and that there are increasing marginal costs to investment which vary randomly from period to period. The results are that so long as the non-negativity constraints are surely never binding, current investment does not decrease with increased uncertainty in future output prices and wage rates and is invariant to increased uncertainty in future investment costs.

Optimal Partially Reversible Investment

Abstract Investment is partially reversible if there is a wedge between the prices at which a firm can buy and sell capital. We derive the optimal investment strategy for a risk-neutral firm with partially reversible investment when capital prices and the shocks to capitals marginal revenue product evolve as geometric Brownian motion. We examine some of the effects of increased uncertainty on the optimal investment strategy and on the long-run average growth rate of capital, and we argue that the long-run average growth rate of capital is the same whether investment is completely reversible, partially reversible, or completely irreversible.

Option value under income and price uncertainty

Abstract We present a rigorous examination of the sign of option value under income and price uncertainty. We state and prove three theorems on the sign of option value when preferences are state independent. If income is uncertain, the sign of option value is opposite the sign of the income elasticity of the good in question. The analysis of price uncertainty is in two parts: one covers the case of own price uncertainty and the other the case where the price of some other good is uncertain. In both cases the sign of option value is generally ambiguous.

Investment Neutrality of Business Income Taxes

I. Introduction, 245.—II. The model, 247.—III. The model with full investment write-off, 248.—IV. Depreciation deductions depend on the capital stock, 251.—V. Depreciation deductions depend on the time profile of past investments, 256.—VI. Concluding comments, 258.

Money, inflation, and investment

Abstract This paper analyzes an infinite horizon, optimizing, monetary growth model with endogenously determined income tax rates. The technology is linear and random, and preferences exhibit unitary relative risk aversion and a constant elasticity of substitution between real money balances and consumption. An explicit solution for the rational expectations equilibrium is derived. The relationship between the money growth rate and investment depends on the elasticity of substitution. Moreover, maximizing welfare is inconsistent with choosing a money growth rule to maximize investment.

The Term Structure of Interest Rates and the Demand for Investment

This paper examines the question of whether long-term or short-term interest rates should appear in investment demand functions. Three basic models are examined. The first involves a distribution of time lags required to complete investment projects; the second is based on a simple adjustment-costs model; and the third incorporates uncertainty and risk aversion. The major conclusion is that, except for some special cases which are probably quite unrealistic, both long-term and short-term interest rates affect investment demand.