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Investment dynamics with information costs

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  • Verona, Fabio

Abstract

Investment in physical capital at the micro level is infrequent and large, or lumpy. The most common explanation for this is that firms face non-convex physical adjustment costs. The model developed in this paper shows that information costs make investment lumpy at the micro level, even in the absence of non-convex adjustment costs. When collecting and processing information is costly, the firm optimally chooses to do it sporadically and to be inactive most of the time. This behavior results in infrequent and possibly large capital adjustments. The model fits plant-level investment rate moments well, and it also matches some higher order moments of aggregate investment rates. Keywords: investment dynamics, information costs, inattentiveness, lumpy investment JEL classification: D21, D83, D92, E22

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  • Verona, Fabio, 2013. "Investment dynamics with information costs," Research Discussion Papers 18/2013, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2013_018
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    Citations

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    Cited by:

    1. Verona, Fabio, 2014. "Pervasive inattentiveness," Economics Letters, Elsevier, vol. 125(2), pages 287-290.
    2. Bellalah, Mondher & Bradford, Marc & Zhang, Detao, 2016. "A general theory of corporate international investment under incomplete information, short sales and taxes," Economic Modelling, Elsevier, vol. 58(C), pages 615-626.
    3. repec:spr:annopr:v:262:y:2018:i:2:d:10.1007_s10479-015-2050-y is not listed on IDEAS
    4. Bellalah, Mondher, 2016. "Shadow costs of incomplete information and short sales in the valuation of the firm and its assets," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 406-419.
    5. repec:eee:ecmode:v:67:y:2017:i:c:p:316-324 is not listed on IDEAS
    6. Fabio Verona, 2011. "Lumpy investment in sticky information general equilibrium," CEF.UP Working Papers 1102, Universidade do Porto, Faculdade de Economia do Porto.
    7. Kilponen, Juha & Verona, Fabio, 2016. "Testing the Q theory of investment in the frequency domain," Research Discussion Papers 32/2016, Bank of Finland.
    8. Zorn, Peter, 2016. "Investment under Rational Inattention: Evidence from US Sectoral Data," Annual Conference 2016 (Augsburg): Demographic Change 145572, Verein für Socialpolitik / German Economic Association.
    9. Crowley, Patrick M. & Garcia, Enrique & Quah Chee-Heong, 2013. "Is Europe growing together or growing apart?," Research Discussion Papers 33/2013, Bank of Finland.
    10. repec:spr:annopr:v:262:y:2018:i:2:d:10.1007_s10479-016-2256-7 is not listed on IDEAS

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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