The dynamics of investment under uncertainty.

We derive robust predictions on the effects of uncertainty on short-run investment dynamics in a broad class of models with (partial) irreversibility. When their environments becomes more uncertain, firms become more cautious and less responsive to demand shocks. This result contrasts with the long-run analysis, in which the effect of real options on the level of the capital stock is ambiguous. An investment model is estimated to test these theoretical predications using a panel of UK firms and a stock returns-based measure of uncertainty. As predicted we find that uncertainty reduces firms' responsiveness to demand shocks