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Extensive and Intensive Investment Over the Business Cycle

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Author Info

  • Boyan Jovanovic

    ()
    (Department of Economics, New York University)

  • Peter L. Rousseau

    ()
    (Department of Economics, Vanderbilt University)

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. A composite-capital version of the model fits the data well using aggregates since 1900 and our new database of firm-level Qs that extend back to 1920.

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File URL: http://www.accessecon.com/pubs/VUECON/vu09-w12.pdf
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0912.

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Date of creation: Sep 2009
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Handle: RePEc:van:wpaper:0912

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Compatibility costs; composite capital; vintage capital; Tobin's Q; 20th century investment;

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Cited by:
  1. P.D. Koellinger & A.R. Thurik, 0000. "Entrepreneurship and the Business Cycle," Tinbergen Institute Discussion Papers 09-032/3, Tinbergen Institute, revised 30 Sep 2009.
  2. repec:dgr:uvatin:0000032 is not listed on IDEAS

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