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Persistence of Capacity Shortage and the Role of Adjustment Costs

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  • Ciaran Driver
  • Nigel Meade

Abstract

This paper finds that plant capital constraints on output in UK industry tend to persist for surprisingly long periods, reflecting a slow response of capital investment. The paper examines the conventional view that this response pattern may be explained by cost of adjustment. Using UK time‐series data for a small number of industry groups, it is shown that the observed dynamics of capital constraints (capital shortage) are not fully explained by a quadratic adjustment cost model or by alternative forms of adjustment cost.

Suggested Citation

  • Ciaran Driver & Nigel Meade, 2001. "Persistence of Capacity Shortage and the Role of Adjustment Costs," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(1), pages 27-47, February.
    • Handle: RePEc:bla:scotjp:v:48:y:2001:i:1:p:27-47
    DOI: 10.1111/1467-9485.00183
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    Cited by:

    1. Ciaran Driver & Katsushi Imai & Paul Temple & Giovanni Urga, 2002. "The Effect of Uncertainty on UK Investment Authorisation: Pooled Estimators vs. Heterogeneous Estimators1," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B3-4, International Conferences on Panel Data.
    2. Ciaran Driver & Paul Temple & Giovanni Urga, 2005. "Contrasts Between Classes of Assets in Fixed Investment Equations as a Way of Testing Real Option Theory," School of Economics Discussion Papers 0805, School of Economics, University of Surrey.

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