Research / BFI Working PaperNov 08, 2022

Investment and Subjective Uncertainty

Nicholas Bloom, Steven J. Davis, Lucia Foster, Scott Ohlmacher, Itay Saporta-Eksten

A longstanding challenge in evaluating the impact of uncertainty on investment is obtaining measures of managers’ subjective uncertainty. We address this challenge by using a detailed new survey measure of subjective uncertainty collected by the U.S. Census Bureau for approximately 25,000 manufacturing plants. We find three key results. First, investment is strongly and robustly negatively associated with higher uncertainty, with a two standard deviation increase in uncertainty associated with about a 6% reduction in investment. Second, uncertainty is also negatively related to employment growth and overall shipments (sales) growth, which highlights the damaging impact of uncertainty on firm growth. Third, flexible inputs like rental capital and temporary workers show a positive relationship to uncertainty, demonstrating that businesses switch from less flexible to more flexible factor inputs at higher levels of uncertainty.

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