Pseudo-maximum likelihood estimation of a dynamic structural investment model
This paper belongs to the recent investment literature focused on the modelling of microeconomic investment decisions. The increasing concern about this topic is related to the growing availability of microeconomic datasets which show the investment behavior taking place at the firm level. This behavior is far from the smooth capital adjustment pattern derived from the traditional investment models. Rather it is characterized by infrequent and lumpy adjustment. New investment models must be considered to capture this behavior. In this paper we formulate a dynamic structural investment model with irreversibility and nonconvex adjustment costs and try to stress the importance of these costs in the firms' investment decisions. From the methodological point of view, we set the investment decision on the dynamic programming framework. More specifically, we consider a discrete choice dynamic programming problem in which firms decide to invest or not to invest. The estimation strategy we adopt is the Nested Pseudo-Likelihood (NPL) algorithm recently proposed by Aguirregabiria and Mira (2002). It is an estimation method which has clear advantages over previous techniques proposed in this context. Up to our knowledge, this paper constitutes the first empirical application of this estimation method.
|Date of creation:||Dec 2002|
|Contact details of provider:|| Web page: http://portal.uc3m.es/portal/page/portal/dpto_estadistica|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Victor Aguirregabiria, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 275-308.
- Øivind Anti Nilsen & Fabio Schiantarelli, 2003.
"Zeros and Lumps in Investment: Empirical Evidence on Irreversibilities and Nonconvexities,"
The Review of Economics and Statistics,
MIT Press, vol. 85(4), pages 1021-1037, November.
- 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.
- Barnett, Steven A. & Sakellaris, Plutarchos, 1998. "Nonlinear response of firm investment to Q:: Testing a model of convex and non-convex adjustment costs1," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 261-288, July.
- Victor Aguirregabiria & Pedro Mira, 2002. "Swapping the Nested Fixed Point Algorithm: A Class of Estimators for Discrete Markov Decision Models," Econometrica, Econometric Society, vol. 70(4), pages 1519-1543, July.
- Victor Aguirregabiria & Pedro Mira, 1999. "Swapping the Nested Fixed-Point Algorithm: a Class of Estimators for Discrete Markov Decision Models," Computing in Economics and Finance 1999 332, Society for Computational Economics.
- 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. Full references (including those not matched with items on IDEAS)