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Investment dynamics with information costs

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.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1318.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 18/2013.

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Length: 38 pages
Date of creation: 28 Aug 2013
Date of revision:
Publication status: Published as Verona, Fabio, 'Investment dynamics with information costs' in Journal of Money, Credit and Banking, 2014, pages 1627-1656.
Handle: RePEc:hhs:bofrdp:2013_018
Note: This is a revised version of a paper that circulated previously under the title“Inattentiveness:an alternative explanation of investment gulps”.
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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