We nd that high macroeconomic uncertainty is associated with greater accumulation
of physical capital, despite a reduction in investment and valuations. To reconcile
this puzzling evidence, we show that uncertainty predicts lower depreciation and utilization
of existing capital, which dominates the investment slowdown. Motivated by
these dynamics, we develop a quantitative production-based model in which rms implement
precautionary savings through reducing utilization rather than raising investment.
Through this novel intensive-margin mechanism, uncertainty shocks command
a quarter of the equity premium in general equilibrium, while
exibility in utilization
adjustments helps explain uncertainty risk exposures in the cross-section of industry
returns.
