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Extensive and Intensive Investment over the Business Cycle

  • Boyan Jovanovic
  • Peter L. Rousseau

Investment of US 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.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 122 (2014)
Issue (Month): 4 ()
Pages: 863 - 908

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Handle: RePEc:ucp:jpolec:doi:10.1086/676405
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