2020 Klein Lecture—Investment and Subjective Uncertainty

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 survey measure of uncertainty collected by the U.S. Census Bureau for approximately 25,000 manufacturing plants. We find three key results. First, investment is negatively associated with higher uncertainty. Second, uncertainty is also negatively related to employment growth and overall shipments growth, which highlights the damaging impact of uncertainty. Third, rental capital and temporary workers are positively correlated with uncertainty, demonstrating that businesses switch from less flexible to more flexible inputs under uncertainty.