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Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application

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  • Russell Cooper
  • John C. Haltiwanger
  • Jonathan L. Willis

Abstract

This paper studies capital adjustment at the establishment level. Our goal is to characterize capital adjustment costs, which are important for understanding both the dynamics of aggregate investment and the impact of various policies on capital accu- mulation. Our estimation strategy searches for parameters that minimize ex post errors in an Euler equation. This strategy is quite common in models for which adjustment occurs in each period. Here, we extend that logic to the estimation of parameters of dynamic optimization problems in which non-convexities lead to extended periods of investment inactivity. In doing so, we create a method to take into account censored observations stemming from intermittent investment. This methodology allows us to take the structural model directly to the data, avoiding time-consuming simulation- based methods. To study the effectiveness of this methodology, we first undertake several Monte Carlo exercises using data generated by the structural model. We then estimate capital adjustment costs for U.S. manufacturing establishments in two sectors.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15675.

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Date of creation: Jan 2010
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Handle: RePEc:nbr:nberwo:15675

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  1. Janice C. Eberly, . "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Rodney L. White Center for Financial Research Working Papers 22-91, Wharton School Rodney L. White Center for Financial Research.
  2. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  3. Aguirregabiria, V., 1997. "Estimation of Dynamic Programming Models with Censored Dependent Variables," UWO Department of Economics Working Papers 9711, University of Western Ontario, Department of Economics.
  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.
  5. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  6. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February.
  7. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
  8. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application
    by Christian Zimmermann in NEP-DGE blog on 2010-02-15 18:13:04
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Cited by:
  1. Yashiv, Eran, 2011. "The Joint Behavior of Hiring and Investment," CEPR Discussion Papers 8237, C.E.P.R. Discussion Papers.
  2. Yosef Bonaparte & Russell Cooper, 2010. "Costly Portfolio Adjustment," Economics Working Papers ECO2010/19, European University Institute.
  3. Victor Aguirregabiria & Arvind Magesan, 2013. "Euler Equations for the Estimation of Dynamic Discrete Choice Structural Models," Working Papers tecipa-489, University of Toronto, Department of Economics.
  4. Yashiv, Eran, 2012. "Frictions and the Joint Behavior of Hiring and Investment," IZA Discussion Papers 6636, Institute for the Study of Labor (IZA).

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