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Irreversible Investment, Capital Costs and Productivity Growth: Implications for Telecommunications

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  • Bernstein Jeffrey I.

    (Department of Economics, Florida International University, Miami)

  • Mamuneas Theofanis P.

    (Department of Economics, University of Cyprus)

Abstract

This paper develops a model incorporating costly disinvestment and estimates the associated commitment premium required to invest in telecommunications. Results indicate that the irreversibility premium raises the opportunity cost of capital by 70 percent. This implies an average annual hurdle rate of return of 14 percent over the period 1986-2002. Irreversibility creates a distinction between observed and adjusted TFP growth. Observed growth, which omits the premium, annually averaged 2.8 percent from 1986 to 2002. This rate exceeded the (premium) adjusted TFP growth by 0.7 percentage points, therefore the average annual observed productivity growth overestimated the corrected rate by 33 percent.

Suggested Citation

  • Bernstein Jeffrey I. & Mamuneas Theofanis P., 2007. "Irreversible Investment, Capital Costs and Productivity Growth: Implications for Telecommunications," Review of Network Economics, De Gruyter, vol. 6(3), pages 1-22, September.
    • Handle: RePEc:bpj:rneart:v:6:y:2007:i:3:n:3
    DOI: 10.2202/1446-9022.1122
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    References listed on IDEAS

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    1. Jeffrey I. Bernstein & Theofanis P. Mamuneas & Panos Pashardes, 2004. "Technical Efficiency and U.S. Manufacturing Productivity Growth," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 402-412, February.
    2. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862, Elsevier.
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    Cited by:

    1. Wei Li & Yongqin Xi & Jiayang Lu & Feimei Wu & Pengfei Wu, 2019. "Interactive relationships between industrial, urban, agricultural, information, and green development," Energy & Environment, , vol. 30(6), pages 991-1009, September.
    2. Elizabeth Baldwin & Yongyang Cai & Karlygash Kuralbayeva, 2018. "To Build or Not to Build? Capital Stocks and Climate Policy," CESifo Working Paper Series 6884, CESifo.
    3. Baldwin, Elizabeth & Cai, Yongyang & Kuralbayeva, Karlygash, 2020. "To build or not to build? Capital stocks and climate policy∗," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).

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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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