From a theoretical point of view, uncertainty over the demand for a firm’s product may have unclear effects on investments, as it depends on a number of factors, such as the production technology and the degree of competition in the product market. Most of the empirical research has been based on cross-section analysis, which has prevented a deeper investigation of the interplay of different factors in the temporal dimension. The aim of this paper is to extend the results of the empirical literature by using a panel of Italian firms over a fairly long period of time (1996-2004), covering a complete business cycle. A key finding of our paper concerns the role played by the degree of the competition faced by Italian firms over the 1996-2004 period. More specifically, the gradual loss of market power experienced by Italian manufacturing firms along with the increasing flexibility of the labour input may have contributed to weaken the negative effect of uncertainty on investment decisions.
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