Investment, capacity, and uncertainty: a putty-clay approach

We embed the microeconomic decisions associated with investment under uncertainty, capacity utilization, and machine replacement in a general equilibrium model based on putty-clay technology. In the presence of irreversible factor proportions, a mean-preserving spread in the productivity of investment reduces investment at the project level, but raises aggregate investment, productivity, and output. Increases in uncertainty have important dynamic implications, causing sustained increases in investment and hours and a medium-term expansion in the growth rate of labor productivity.