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That Elusive Elasticity: A Long-Panel Approach To Estimating The Price Sensitivity Of Business Capital

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  • Robert S. Chirinko

    ()
    (Emory University)

  • Steven M. Fazzari

    ()
    (Washington University)

  • Andrew P. Meyer

    ()
    (Federal Reserve Bank of St. Louis)

Abstract

The sensitivity of business capital formation to its user cost plays a key role in the analysis of many economic issues. Although this elasticity has been the subject of an enormous number of studies, a consensus remains elusive. We develop an estimation strategy that exploits panel data in an original way and avoids several pitfalls - difficult-to-specify dynamics, transitory time-series variation, and positively sloped supply schedules - inherent in investment equations that can bias the estimated elasticity. Results are based on an extensive panel containing 1,860 manufacturing and non-manufacturing firms. Our model generates a precisely estimated user cost elasticity of approximately 0.40. The method developed here may prove useful in estimating other structural parameters from panel datasets.

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Bibliographic Info

Paper provided by International Conferences on Panel Data in its series 10th International Conference on Panel Data, Berlin, July 5-6, 2002 with number B3-1.

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Date of creation: Jan 2002
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Handle: RePEc:cpd:pd2002:b3-1

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Cited by:
  1. Colin Ellis & Simon Price, 2004. "UK business investment: long-run elasticities and short-run dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 27, Money Macro and Finance Research Group.
  2. Andrew T. Young & Hernando Zuleta & Andres Garcia-Suaza, 2010. "Evidence of Induced Innovation in US Sectoral Capital’s Shares," Working Papers 10-03, Department of Economics, West Virginia University.
  3. Schaller, Huntley, 2006. "Econometric Issues in Estimating User Cost Elasticity," Economics Series 194, Institute for Advanced Studies.
  4. Tavani, Daniele, 2008. "Optimal Induced Innovation and Growth with Congestion of a Limited Natural Resource," MPRA Paper 11525, University Library of Munich, Germany.
  5. Bovenberg, A.L. & Goulder, L.H. & Jacobson, M.R., 2006. "Costs of Alternative Environmental Policy Instruments in the Presence of Industry Compensation Requirements," Discussion Paper 2006-127, Tilburg University, Center for Economic Research.
  6. Simon Price & Christoph Schleicher, 2006. "Returns to equity, investment and Q: evidence from the United Kingdom," Bank of England working papers 310, Bank of England.
  7. Dalgaard, Carl-Johan & Jensen, Martin Kaae, 2009. "Life-cycle savings, bequest, and a diminishing impact of scale on growth," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1639-1647, September.
  8. Cameron, Linda & Chapple, Bryan & Davis, Nick & Kousis , Artemisia & Lewis, Geoff, 2007. "New Zealand Financial Markets, Saving and Investment," Occasional Papers 07/5, Ministry of Economic Development, New Zealand.
  9. Michael McMahon & Gabriel Sterne & Jamie Thompson, 2005. "The role of ICT in the global investment cycle," Bank of England working papers 257, Bank of England.
  10. Simon Price, 2004. "UK investment and the return to equity: Q redux," Money Macro and Finance (MMF) Research Group Conference 2004 87, Money Macro and Finance Research Group.
  11. A. Lans Bovenberg & Lawrence H. Goulder & Mark R. Jacobsen, 2007. "Industry Compensation and the Costs of Alternative Environmental Policy Instruments," NBER Working Papers 13331, National Bureau of Economic Research, Inc.
  12. repec:hal:cesptp:halshs-00119490 is not listed on IDEAS

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