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qGMM Estimation of Sunk Costs

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  • Jeffrey R. Campbell
  • Jonas D.M. Fisher

Abstract

This paper estimates a structural model of firm growth and partially sunk investment. In the model, the firm's optimal adjustment keeps the gap between the actual capital stock and its frictionless counterpart between two boundaries. We show that any two quantiles of output growth conditional on the firm's history are sufficient to identify the sunk cost of investment, the firm's span of control, and the distribution of technology shocks; and we estimate these structural parameters using moment conditions based on these conditional quantiles. Because the optimal weighting matrix is known, our one-step GMM estimates are efficient. Furthermore, they require no parametric assumptions on the firm's idiosyncratic shocks. We apply this procedure to estimate the adjustment rule of COMINCO's electrolytic zinc refining facility in Trail, B.C

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 66.

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Date of creation: 2004
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Handle: RePEc:red:sed004:66

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Keywords: Quantile Estimation; Irreversible Investment;

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