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

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Author Info
Robert S. Chirinko () (Emory University)
Steven M. Fazzari () (Washington University)
Andrew P. Meyer () (Federal Reserve Bank of St. Louis)

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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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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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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.:
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    Other versions:
  2. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 2000. "Investment-Cash Flow Sensitivities Are Useful: A Comment On Kaplan And Zingales," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 695-705, May. [Downloadable!] (restricted)
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    Other versions:
  8. Coen, Robert M, 1969. "Tax Policy and Investment Behavior: Comment," American Economic Review, American Economic Association, vol. 59(3), pages 370-79, June.
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  10. Berndt, Ernst R, 1976. "Reconciling Alternative Estimates of the Elasticity of Substitution," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 59-68, February. [Downloadable!] (restricted)
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  13. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(1), pages 41-56, March. [Downloadable!] (restricted)
  14. 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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  15. Nobuhiro Kiyotaki & Kenneth D. West, 1996. "Business Fixed Investment and the Recent Business Cycle in Japan," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 277-344 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  16. Cummins, Jason G. & Hassett, Kevin A. & Hubbard, R. Glenn, 1996. "Tax reforms and investment: A cross-country comparison," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 237-273, October. [Downloadable!] (restricted)
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  17. Eisner, Robert, 1970. "Tax Policy and Investment Behavior: Further Comment," American Economic Review, American Economic Association, vol. 60(4), pages 746-52, September. [Downloadable!] (restricted)
  18. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
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  20. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October. [Downloadable!] (restricted)
  21. Hassett, Kevin A & Hubbard, R Glenn, 1998. "Are Investment Incentives Blunted by Changes in Prices of Capital Goods?," International Finance, Blackwell Publishing, vol. 1(1), pages 103-25, October. [Downloadable!] (restricted)
    Other versions:
  22. Eisner, Robert & Nadiri, M Ishaq, 1970. "Neoclassical Theory of Investment Behavior: A Comment," The Review of Economics and Statistics, MIT Press, vol. 52(2), pages 216-22, May. [Downloadable!] (restricted)
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Cited by:
(explanations, 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. 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. [Downloadable!] (restricted)
  2. Robert Chirinko, 2002. "Corporate Taxation, Capital Formation, and the Substitution Elasticity between Labor and Capital," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Michael McMahon & Gabriel Sterne & Jamie Thompson, . "The role of ICT in the global investment cycle," Bank of England working papers 257, Bank of England. [Downloadable!]
  4. Colin Ellis & Simon Price, . "UK business investment: long-run elasticities and short-run dynamics," Bank of England working papers 196, Bank of England. [Downloadable!]
    Other versions:
  5. Bovenberg, A.L. & Goulder, L.H. & Gurney, D.J., 2003. "Efficiency costs of meeting industry-distributional constraints under environmental permits and taxes," Discussion Paper 86, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  6. Simon Price & Christoph Schleicher, . "Returns to equity, investment and Q: evidence from the United Kingdom," Bank of England working papers 310, Bank of England. [Downloadable!]
  7. Tavani, Daniele, 2008. "Optimal Induced Innovation and Growth with Congestion of a Limited Natural Resource," MPRA Paper 11525, University Library of Munich, Germany. [Downloadable!]
  8. Carl-Johan Dalgaard & Martin Kaae Jensen, 2007. "Life Cycle Savings, Bequest, and the Diminishing Impact of Scale on Growth," Discussion Papers 07-17, University of Copenhagen. Department of Economics. [Downloadable!]
  9. 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. [Downloadable!]
  10. Schaller, Huntley, 2006. "Econometric Issues in Estimating User Cost Elasticity," Economics Series 194, Institute for Advanced Studies. [Downloadable!]
  11. Bovenberg, Lans & Goulder, Lawrence H. & Jacobson, Mark R., 2006. "Costs of alternative environmental policy instruments in the presence of industry compensation requirements," Discussion Paper 127, Tilburg University, Center for Economic Research. [Downloadable!]
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