Uncertainty, Asset Specificity, and Entrepreneurial Adaptation

Entrepreneurs’ exposure to economic uncertainty from regulation, monetary policy, and taxation is exacerbated by the inflexibility of capital asset commitments. Entrepreneurs adapt to uncertainty by reducing asset specificity. While the mainstream approach tends to focus on reduced aggregate investment resulting from uncertainty, the effects cannot be fully comprehended without appreciating the heterogeneity of the capital structure. Entrepreneurial adaptations, such as increasing the proportion of precautionary assets, reduce the roundaboutness of the production process, mitigating uncertainty but reducing economic growth. The emphases of the Austrian school on entrepreneurial judgment and heterogeneous capital clarify the connection between uncertainty and economic growth.