The Role of Relative Price Volatility in the Efficiency of Investment Allocation
This paper estimates the impact of relative price volatility on sector-level investment allocation using a panel of 65 countries with data for 26 manufacturing industries over the period 1985-2003. Results indicate that volatility distorts efficient investment allocation in that investment is not necessarily devoted to relatively more productive sectors, especially in emerging market economies that are highly exposed and may lack the necessary institutions to deal with it successfully. This is evidence in support of theories suggesting that relative price volatility provides incentives for entrepreneurs to adopt more malleable but less productive production technologies, enabling them to accommodate more easily abrupt and frequent changes in relative prices, but at the cost of using less productive technologies.
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| Format: | Working Papers biblioteca |
| Language: | English |
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Inter-American Development Bank
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| Subjects: | Financial Crisis and Structural Adjustement, Investment, Business Development, D24 - Production • Cost • Capital • Capital Total Factor and Multifactor Productivity • Capacity, E22 - Investment • Capital • Intangible Capital • Capacity, L60 - Industry Studies: Manufacturing: General, O31 - Innovation and Invention: Processes and Incentives, IDB-WP-208, |
| Online Access: | http://dx.doi.org/10.18235/0010993 https://publications.iadb.org/en/role-relative-price-volatility-efficiency-investment-allocation |
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| Summary: | This paper estimates the impact of relative price volatility on sector-level investment allocation using a panel of 65 countries with data for 26 manufacturing industries over the period 1985-2003. Results indicate that volatility distorts efficient investment allocation in that investment is not necessarily devoted to relatively more productive sectors, especially in emerging market economies that are highly exposed and may lack the necessary institutions to deal with it successfully. This is evidence in support of theories suggesting that relative price volatility provides incentives for entrepreneurs to adopt more malleable but less productive production technologies, enabling them to accommodate more easily abrupt and frequent changes in relative prices, but at the cost of using less productive technologies. |
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