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Capital Utilization and Capital Accumulation: Theory and Evidence

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  • Shapiro, Matthew D

Abstract

A firm may acquire additional capital input by purchasing new capital or by increasing the utilization of its current capital. The margin between capita accumulation and capital utilization is studied in a model of dynamic factor demand where the firm chooses capital, labor, and their rates of utilization. A direct measure of capital utilization -- the work week of capital -- is incorporated into the theory and estimates. The methodology advocated by Hansen and Singleton (1982) is used to obtain estimates of the model's parameters. This methodology allows the firm's decision problem to depend on expected values of future endogenous and exogenous functional form or the distribution of shocks to the system. The estimates imply that capital stock is costly to adjust while the work week of capital is essentially costless to adjust. Hence, the work week of capital overshoots the steady state when innovations in policy or other shocks change the demand for capital. Short run variation in the demand for capital is met by changing utilization. Long run variation is met by changing the stock. The estimated response of the capital stock to changes in its price and in the required rate of return is substantial and it takes place more quickly than found in other estimates. These results provide an important challenge to the view that input prices and required rates of return are empirically unimportant in models of the demand for capital.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 1 (1986)
Issue (Month): 3 (July)
Pages: 211-34

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Handle: RePEc:jae:japmet:v:1:y:1986:i:3:p:211-34

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References

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  1. Winston, Gordon C, 1974. "The Theory of Capital Utilization and Idleness," Journal of Economic Literature, American Economic Association, vol. 12(4), pages 1301-20, December.
  2. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
  3. Pindyck, Robert S & Rotemberg, Julio J, 1983. " Dynamic Factor Demands under Rational Expectations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(2), pages 223-38.
  4. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  5. Betancourt,Roger R. & Clague,Christopher K., 2008. "Capital Utilization," Cambridge Books, Cambridge University Press, number 9780521070287.
  6. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March.
  7. Shapiro, Matthew D, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 513-42, August.
  8. Nadiri, M Ishaq & Rosen, Sherwin, 1969. "Interrelated Factor Demand Functions," American Economic Review, American Economic Association, vol. 59(4), pages 457-71, Part I Se.
  9. Sargent, Thomas J, 1978. "Estimation of Dynamic Labor Demand Schedules under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1009-44, December.
  10. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May.
  11. Feldstein, Martin S & Foot, David K, 1971. "The Other Half of Gross Investment: Replacement and Modernization Expenditures," The Review of Economics and Statistics, MIT Press, vol. 53(1), pages 49-58, February.
  12. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-75, November.
  13. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  14. Richard Meese, 1980. "Dynamic factor demand schedules for labor and capital under rational expectations," International Finance Discussion Papers 153, Board of Governors of the Federal Reserve System (U.S.).
  15. Peter M. Garber & Robert G. King, 1983. "Deep Structral Excavation? A Critique of Euler Equation Methods," NBER Technical Working Papers 0031, National Bureau of Economic Research, Inc.
  16. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  17. Bernanke, Ben S, 1983. "The Determinants of Investment: Another Look," American Economic Review, American Economic Association, vol. 73(2), pages 71-75, May.
  18. Rotemberg, Julio J, 1984. "Interpreting the Statistical Failures of Some Rational Expectations Macroeconomic Models," American Economic Review, American Economic Association, vol. 74(2), pages 188-93, May.
  19. Kennan, John, 1979. "The Estimation of Partial Adjustment Models with Rational Expectations," Econometrica, Econometric Society, vol. 47(6), pages 1441-55, November.
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