Risk-aversion and the investment-uncertainty relationship: The role of capital depreciation

Some recent contributions [Nakamura, T., 1999. Risk-aversion and the uncertainty-investment relationship: a note. Journal of Economic Behavior and Organization 38, 357-363; Saltari, E., Ticchi, D., 2005. Risk-aversion and the investment-uncertainty relationship: a comment. Journal of Economic Behavior and Organization 56, 121-125] suggest that investments react negatively to uncertainty when the risk aversion index characterizing firm's preferences is lower than one but higher than the labour income share of output. We show that this result crucially depends on the assumption of complete capital depreciation after production. When realistic values for the capital depreciation parameter are taken into account, the investment-uncertainty relation is negative for values of the risk-aversion index larger than unity. (C) 2006 Elsevier B.V. All rights reserved.