Capital Investment and uncertainty

One of the main reasons for lower UK labour productivity is that Britain has historically invested less (especially in R&D) than other countries. Is there a role for financial markets in explaining this? See Investment, R&D and Financial Constraints in Britain and Germany.

An alternative explanation is that higher uncertainty ("Boom and Bust") is a culprit - see Real Options, Patents, Productivity and Market Value: Evidence from a panel of British firms

As global macro-uncertainty seems to have fallen over the last 20 years micro-uncertainty may have increased - is this still a problem? We have been developing new models of analysing investment under uncertainty to address these questions drawing on advances in theoretical models of 'real options' and in the power of computers to numerically simulate complex models. We summarise some of these models in Stephen Bond & John Van Reenen, Microeconometric Models of Investment and Employment and propose new ways of modelling investment - see Nick Bloom, Stephen Bond and John Van Reenen, Uncertainty and Investment Dynamics. The software for these models is available at: http://cep.lse.ac.uk/matlabcode/.

We have also been looking at the impact of large uncertainty shocks - such as the 9/11 terrorist attack - on the economy. The full article is available at http://cep.lse.ac.uk/pubs/download/dp0718.pdf and a summary on http://cep.lse.ac.uk/centrepiece/v11i2/bloom.pdf.

For further information contact Nick Bloom

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