What do we knout about investment under uncertainty?

Recent theoretical developments relating to investment under uncertainty ha ve highlighted the importance of irreversibility for the timing of investme nt expenditures and their expected returns. This has subsequently stimulate d a growing empirical literature which examines uncertainty and threshold e ffects on investment behaviour. This paper presents a review of this litera ture. A variety of methods have been used to investigate the empirical impl ication of irreversibility in investment, the majority focusing on the rela tionship between investment flows and proxy measures of uncertainty. A gene ral conclusion is that increased uncertainty, at both aggregate and disaggr egate levels, leads to lower investment rates. This suggests that there is an irreversibility effect, under which greater uncertainty raises the value of the 'call option' to delay a commitment to investment. This effect appe ars to dominate any positive impact on investment arising from the fact tha t greater uncertability, under certain circumstances, increases the margina l profitability of capital. The methods used raise a number of issues which call into question the reliability of the findings, and these are addresse d in the paper. However, if such irreversibility effects are present, then their omission from traditional investment models casts doubt on the effica cy of such specifications. JEL Classification: D81, D92, E22