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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)

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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.vanderbilt.edu/Econ/wparchive/workpaper/vu09-w12.pdf
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File Function: First version, 2009
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Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series 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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Related research
Keywords: Compatibility costs; composite capital; vintage capital; Tobin's Q; 20th century investment;

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
N1 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations
O3 - Economic Development, Technological Change, and Growth - - Technological Change

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This page was last updated on 2009-11-14.

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