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Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application

Author

Listed:
  • Russell Cooper
  • John Haltiwanger
  • Jonathan Willis

Abstract

This paper studies capital adjustment at the establishment level. Our goal is to characterize capital adjustment costs, which are important for understanding both the dynamics of aggregate investment and the impact of various policies on capital accumulation. Our estimation strategy searches for parameters that minimize ex post errors in an Euler equation. This strategy is quite common in models for which adjustment occurs in each period. Here, we extend that logic to the estimation of parameters of dynamic optimization problems in which non-convexities lead to extended periods of investment inactivity. In doing so, we create a method to take into account censored observations stemming from intermittent investment. This methodology allows us to take the structural model directly to the data, avoiding time-consuming simulation based methods. To study the effectiveness of this methodology, we first undertake several Monte Carlo exercises using data generated by the structural model. We then estimate capital adjustment costs for U.S. manufacturing establishments in two sectors.

Suggested Citation

  • Russell Cooper & John Haltiwanger & Jonathan Willis, 2010. "Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application," Working Papers 10-02, Center for Economic Studies, U.S. Census Bureau.
    • Handle: RePEc:cen:wpaper:10-02
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    File URL: https://www2.census.gov/ces/wp/2010/CES-WP-10-02.pdf
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application
      by Christian Zimmermann in NEP-DGE blog on 2010-02-16 00:13:04

    Citations

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    Cited by:

    1. Yashiv, Eran, 2011. "The Joint Behavior of Hiring and Investment," CEPR Discussion Papers 8237, C.E.P.R. Discussion Papers.
    2. Victor Aguirregabiria & Arvind Magesan, 2013. "Euler Equations for the Estimation of Dynamic Discrete Choice Structural Models," Advances in Econometrics, in: Structural Econometric Models, volume 31, pages 3-44, Emerald Group Publishing Limited.
    3. Hirokazu Mizobata, 2014. "What determines the Japanese firm investments: real or financial?," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 303-311, January.
    4. Victor Aguirregabiria & Arvind Magesan, "undated". "Soultion and Estimation of Dynamic Discrete Choice Structural Models Using Euler Equations," Working Papers 2016-32, Department of Economics, University of Calgary, revised 24 May 2016.
    5. Yashiv, Eran, 2012. "Frictions and the Joint Behavior of Hiring and Investment," IZA Discussion Papers 6636, Institute of Labor Economics (IZA).
    6. Letterie, Wilko & Nilsen, Øivind A., 2016. "Price Changes - Stickiness and Internal Coordination in Multiproduct Firms," Discussion Paper Series in Economics 21/2016, Norwegian School of Economics, Department of Economics.
    7. Hirokazu Mizobata, 2015. "Hiring, investments, and financial distress: evidence from a Panel VAR analysis of Japanese firms," Economics Bulletin, AccessEcon, vol. 35(4), pages 2558-2566.
    8. Yashiv, Eran, "undated". "Capital Values, Job Values and the Joint Behavior of Hiring and Investment," Foerder Institute for Economic Research Working Papers 275799, Tel-Aviv University > Foerder Institute for Economic Research.
    9. Yaman, F., 2016. "Structural Estimation of Labor Adjustment Costs," Working Papers 15/22, Department of Economics, City St George's, University of London.
    10. Youngwoo Rho & Joel Rodrigue, 2016. "Firm‐Level Investment And Export Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(1), pages 271-304, February.
    11. Yosef Bonaparte & Russell Cooper, 2009. "Costly Portfolio Adjustment," NBER Working Papers 15227, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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