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

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Author Info
Jeffrey I. Bernstein () (Department of Economics, Florida International University)
Theofanis P. Mamuneas (Department of Economics, University of Cyprus)

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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.

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Publisher Info
Article provided by Concept Economics in its journal Review of Network Economics.

Volume (Year): 6 (2007)
Issue (Month): 3 (September)
Pages: 299-320
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Handle: RePEc:rne:rneart:v:6:y:2007:i:3:p:299-320

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Related research
Keywords: Irreversible Investment; Productivity Growth; Telecommunications;

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Find related papers by JEL classification:
L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Robert S. Pindyck, 2005. "Pricing Capital Under Mandatory Unbundling and Facilities Sharing," NBER Working Papers 11225, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
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  3. 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, 04. [Downloadable!] (restricted)
  4. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December. [Downloadable!] (restricted)
    Other versions:
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This page was last updated on 2009-11-16.

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