Factor price uncertainty, technology choice and investment delay
Abstract This paper develops a theory of putty-clay investment under factor price uncertainty using a Brownian motion framework. Ex ante the firm faces a choice of technologies that differ by their relative factor intensities, but ex post technologies are Leontief. The presence of competing technologies and factor price uncertainty can cause delay of profitable investments for a monopolist firm facing a one-time investment decision. Furthermore, uncertainty can cause an existing firm to wait for more extreme operating cost differentials before switching technologies. These delays in investment are present even without considering the effect of uncertainty on the firm's choice of scale.