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Extensive and Intensive Investment over the Business Cycle

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  • Boyan Jovanovic
  • Peter L. Rousseau

Abstract

Investment of U.S. firms responds asymmetrically to Tobin’s Q: investment of established firms — ‘intensive’ investment — reacts negatively to Q whereas investment of new firms — ‘extensive’ investment — responds positively and elastically to Q. This asymmetry, we argue, reflects a difference between established and new firms in the cost of adopting new technologies. A fall in the compatibility of new capital with old capital raises measured Q and reduces the incentive of established firms to invest. New firms do not face such compatibility costs and step up their investment in response to the rise in Q. The model fits the data well using aggregates since 1900.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14960.

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Date of creation: May 2009
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Handle: RePEc:nbr:nberwo:14960

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