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Estimation Of A Dynamic Discrete Choice Model Of Irreversible Investment

  • Rocío Sánchez-Mangas

    ()

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, Departamento de Estadística y Econometría in its series Statistics and Econometrics Working Papers 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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  1. Alonso-Borrego, Cesar, 1998. "Demand for labour inputs and adjustment costs: evidence from Spanish manufacturing firms," Labour Economics, Elsevier, vol. 5(4), pages 475-497, December.
  2. 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.
  3. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
  4. V. Joseph Hotz & Robert A. Miller & Seth Sanders & Jeffrey Smith, 1992. "A Simulation Estimator for Dynamic Models of Discrete Choice," Working Papers 9205, Harris School of Public Policy Studies, University of Chicago.
  5. Victor Aguirregabiria & Cesar Alonso-Borrego, 2009. "Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain," Working Papers tecipa-346, University of Toronto, Department of Economics.
  6. Giuseppe Bertola & Ricardo J. Caballero, 1991. "Irreversibility and Aggregate Investment," NBER Working Papers 3865, National Bureau of Economic Research, Inc.
  7. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
  8. César Alonso-Borrego & Rocío Sánchez-Mangas, 2001. "Gmm Estimation Of A Production Function With Panel Data: An Application To Spanish Manufacturing Firms," Statistics and Econometrics Working Papers ws015527, Universidad Carlos III, Departamento de Estadística y Econometría.
  9. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc.
  10. 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.
  11. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1996. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Documentos de Trabajo 12, Centro de Economía Aplicada, Universidad de Chile.
  12. Michael P. Keane & Kenneth I. Wolpin, 1994. "The solution and estimation of discrete choice dynamic programming models by simulation and interpolation: Monte Carlo evidence," Staff Report 181, Federal Reserve Bank of Minneapolis.
  13. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  14. V. Joseph Hotz & Robert A. Miller, 1992. "Conditional Choice Probabilities and the Estimation of Dynamic Models," Working Papers 9202, Harris School of Public Policy Studies, University of Chicago.
  15. Aguirregabiria, Victor, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 275-308, April.
  16. 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.
  17. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  18. 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.
  19. 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.
  20. repec:att:wimass:9106 is not listed on IDEAS
  21. Richard Blundell & Steve Bond & Frank Windmeijer, 2000. "Estimation in dynamic panel data models: improving on the performance of the standard GMM estimator," IFS Working Papers W00/12, Institute for Fiscal Studies.
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