Journal Article
No. 2009-41 | November 23, 2009
Heterogeneous Parameter Uncertainty and the Timing of Investment during Crisis


We present a model in which investors observe the same macroeconomic data but have varying levels of information about the parameters that determine the distribution of the expected returns on investment. During a crisis that increases macroeconomic uncertainty and reduces asset prices, the threshold required return that triggers investment is lower for an informed investor than for an uninformed investor. Simulation of the model suggests that when macroeconomic uncertainty is high investment may increase, is mostly by informed investors, and as time goes on is progressively more by investors who were initially relatively uninformed about model parameters. For over 10,000 instances of firm-level FDI data for Korea from 1996 to 2001, regression results are consistent with the hypothesis that disproportionably more FDI is made by more informed investors during a period of high macroeconomic uncertainty.

JEL Classification:

D8, E2, F4


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Cite As

Shawn Ni and Ronald A. Ratti (2009). Heterogeneous Parameter Uncertainty and the Timing of Investment during Crisis. Economics: The Open-Access, Open-Assessment E-Journal, 3 (2009-41): 1–29.

Comments and Questions

Hashmat Khan - Fixed Costs
December 08, 2009 - 18:02

I found this article very interesting. It provides evidence (from Korean data) that increases in macroeconomic uncertainty can increase investment (from more informed investors).

I was wondering if it is possible to separate out FDI in going to particular industries classified according to whether these are "high fixed ...[more]

... costs industries" or "low fixed costs industries". Presumably the evidence provided will be even stronger for the latter group.