Uncertainty and Capital Accumulation: Empirical Evidence for African and Asian Firms

This paper presents estimates of the e¤ects of uncertainty on both short run investment behaviour and long run capital accumulation for panels of African and Asian …rms. We estimate structural investment models in which the level of uncertainty in‡uences investment behaviour through di¤erent forms of adjustment costs: partial irreversibility, a …xed cost of undertaking any investment at all, and quadratic adjustment costs. Structural parameters are estimated by matching simulated model moments to empirical data for …rms in China, India, Morocco and Ghana, using a simulated minimum distance estimator. The estimated models suggest that a lower level of uncertainty would have only modest e¤ects on short run investment dynamics, but would result in much higher capital stocks. JEL Classi…cation: E22, D92, D81, C15. Key words: Uncertainty, investment, capital accumulation. Acknowledgement: We thank Nick Bloom and participants at seminars at CSAE, University of Oxford, Fudan University, WISE, Xiamen University and the IFC, World Bank for helpful comments. We thank the ESRC for …nancial support under project RES-156-25-0006. Bond thanks the ESRC Centre for Public Policy at IFS for additional support. Söderbom thanks The Leverhulme Trust for additional support. Wu thanks the Enterprise Analysis Unit of the IFC, World Bank for additional support.