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Zeros and Lumps in Investment: Empirical Evidence on Irreversibilities and Nonconvexities

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Author Info
Øivind Anti Nilsen (University of Bergen)
Fabio Schiantarelli (Boston College)

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Abstract

The objective of this paper is to investigate if and how capital adjustment departs from the smooth pattern implied by standard model based on convex adjustment costs. Using Norwegian micro data, we start by documenting the intermittent and lumpy nature of investment rates. We then present two pieces of econometric evidence on these issues. First, we estimate a discrete hazard model to determine the probability of having an episode of high investment, conditional on the length of the interval from the last high-investment episode. Second, we estimate a switching regression model that allows for the response of the investment rate to fundamentals to differ across regimes. In both cases we investigate the aggregate implications of our results. Copyright (c) 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 85 (2003)
Issue (Month): 4 (December)
Pages: 1021-1037
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Handle: RePEc:tpr:restat:v:85:y:2003:i:4:p:1021-1037

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  3. Ricardo J. Caballero & John V. Leahy, 1996. "Fixed Costs: The Demise of Marginal q," NBER Working Papers 5508, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Simon Gilchrist & Charles P. Himmelberg, 1995. "Evidence on the Role of Cash Flow for Investment," Working Papers 95-01, New York University, Leonard N. Stern School of Business, Department of Economics.
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  5. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March. [Downloadable!] (restricted)
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  8. Schiantarelli, Fabio, 1996. "Financial Constraints and Investment: Methodological Issues and International Evidence," Oxford Review of Economic Policy, Oxford University Press, vol. 12(2), pages 70-89, Summer.
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  10. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1996. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Documentos de Trabajo 12, Centro de Economía Aplicada, Universidad de Chile.
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  11. Leahy, John V & Whited, Toni M, 1996. "The Effect of Uncertainty on Investment: Some Stylized Facts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 64-83, February. [Downloadable!] (restricted)
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  12. Austan Goolsbee & David B. Gross, 1997. "Estimating Adjustment Costs with Data on Heterogeneous Capital Goods," NBER Working Papers 6342, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Eberly, Janice C., 1997. "International evidence on investment and fundamentals," European Economic Review, Elsevier, vol. 41(6), pages 1055-1078, June. [Downloadable!] (restricted)
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  15. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April. [Downloadable!] (restricted)
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  16. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Blackwell Publishing, vol. 47(1), pages 225-38, January. [Downloadable!] (restricted)
  17. Serven, Luis, 1997. "Irreversibility, Uncertainty and Private Investment: Analytical Issues and Some Lessons for Africa," Journal of African Economies, Oxford University Press, vol. 6(3), pages 229-68, Supplemen.
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  19. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Card, David & Sullivan, Daniel G, 1988. "Measuring the Effect of Subsidized Training Programs on Movements in and out of Employment," Econometrica, Econometric Society, vol. 56(3), pages 497-530, May. [Downloadable!] (restricted)
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  21. Abel, Andrew B & Eberly, Janice C, 1994. "A Unified Model of Investment under Uncertainty," American Economic Review, American Economic Association, vol. 84(5), pages 1369-84, December. [Downloadable!] (restricted)
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  22. 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. [Downloadable!] (restricted)
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  23. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-88, March. [Downloadable!] (restricted)
  24. Xiaoqiang Hu & Fabio Schiantarelli, 1998. "Investment And Capital Market Imperfections: A Switching Regression Approach Using U.S. Firm Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 466-479, August. [Downloadable!] (restricted)
  25. Russell Cooper & John Haltiwanger & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September. [Downloadable!] (restricted)
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  26. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-2), pages 1-54. [Downloadable!]
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