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Does the Theory of Irreversible Investments Help Explain Movements in Office-Commerical Construction?

Rena Sivitanidou
Focusing on the relevance of the modern investment theory in explaining movements in office-commercial construction, we attempt to advance existing empirical work in two respects. First, building on recent theoretical advances, we offer an extended empirical model of new construction that accounts for the full opportunity cost of irreversible investments in uncertain environments. Second, using updated time-series of office-commercial construction across the nation's largest markets, we empirically estimate such a model to (i) explore investment behavior during 1982-1998 and (ii) detect differences, if any, in such behavior between the preand post-recession years. Our empirical findings are fully consistent with the theory of irreversible investments. Such findings highlight both the relevance and relative importance of uncertainty in underlying demand factors in shaping movements in office-commercial construction, while pointing altogether to a more cautionary investment behavior during the post-recession years.