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Estimation of a dynamic discrete choice model of irreversible investment

  • Sánchez Mangas, Rocío

In this paper we propose and estimate a dynamic structural model of fixed capital investment at the firm level. Our dataset consists of an unbalanced panel of Spanish manufacturing firms. Two important features are present in this dataset. There are periods in which firms decide not to invest and periods of large investment episodes. These empirical evidence of infrequent and lumpy investment provides evidence in favour of irreversibilities and nonconvex capital adjustment costs. We consider a dynamic discrete choice model of irreversible investment with a general specification of adjustment costs including convex and nonconvex components. We use a two stage estimation procedure. In a first stage, we obtain GMM estimates of technological parameters. In the second stage, we obtain partial maximum likelihood estimates for the adjustment cost parameters. The estimation strategy builds on the representation of conditional value functions as a computable function of conditional choice probabilities. It is in the line of structural estimation techniques which avoid the solution of the dynamic programming problem.

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Paper provided by Universidad Carlos III de Madrid. Departamento de Estadística in its series DES - Working Papers. Statistics and Econometrics. WS with number ws015628.

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Date of creation: Jun 2001
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Handle: RePEc:cte:wsrepe:ws015628
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  5. Oivind Anti Nilsen & Fabio Schiantarelli, 1996. "Zeroes and Lumps in Investment: Empirical Evidence on Irreversibilities and Non-Convexities," Boston College Working Papers in Economics 337., Boston College Department of Economics, revised 01 Nov 2000.
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  8. Alonso-Borrego, César, 1996. "Demand for labour inputs and adjustment costs : evidence from Spanish manufacturing firms," UC3M Working papers. Economics 3976, Universidad Carlos III de Madrid. Departamento de Economía.
  9. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
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  12. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  13. Keane, Michael P & Wolpin, Kenneth I, 1994. "The Solution and Estimation of Discrete Choice Dynamic Programming Models by Simulation and Interpolation: Monte Carlo Evidence," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 648-72, November.
  14. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
  15. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
  16. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
  17. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  18. Rust, J., 1991. "Estimation of dynamic Structural Models: Problems and Prospects Part I : Discrete Decision Processes," Working papers 9106, Wisconsin Madison - Social Systems.
  19. Aguirregabiria, V., 1997. "Estimation of Dynamic Programming Models with Censored Dependent Variables," UWO Department of Economics Working Papers 9711, University of Western Ontario, Department of Economics.
  20. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc.
  21. Alonso-Borrego, César & Sánchez Mangas, Rocío, 2001. "GMM estimation of a production function with panel data : an application to Spanish manufacturing firms," DES - Working Papers. Statistics and Econometrics. WS ws015527, Universidad Carlos III de Madrid. Departamento de Estadística.
  22. V. Joseph Hotz & Robert A. Miller, 1993. "Conditional Choice Probabilities and the Estimation of Dynamic Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 497-529.
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