Testing Uncertainty's Effect in Real Options with Multiple Capital Goods

The irreversible investment theory with heterogeneous capital predicts a negative relationship between uncertainty and the investment extensive margin. We empirically explore this prediction using plant-level data for investment across multiple fixed assets, and employ a discrete ordered choice model. Our results indicate that uncertainty, even after controlling for financial constraints, induces a negative effect on the extensive margin, thereby decreasing the likelihood of investment triggering in more types of capital. This effect takes the form of both a higher probability of investment inactivity but also a lower probability of investment triggering in a higher number of capital types.