The Effects of Uncertainty and Irreversibility on Investment

The present paper examines the robustness of the result derived in the canonical model of investment under uncertainty, and explores the relationship between uncertainty and in-vestment. We have arrived upon the conclusion that, for three different cases of the demand shock, whether or not an increase in uncertainty depresses investment depends on the con-cavity of the operating profit function with respect to the demand shock. However even if the operating profit function is convex in the demand shock, an increase in uncertainty may not necessarily raise investment and would depress investment, depending on the range of model parameters. This result implies that the convexity of the operating profit function need not necessarily to be dismissed due to the emprirical validity of the model.