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Estimating Adjustment Costs with Data on Heterogeneous Capital Goods

  • Austan Goolsbee
  • David B. Gross

This paper estimates the micro-level costs of adjusting capital using detailed data on" investment decisions in the US airline industry. The data include the capital stock retirement, market values, operating costs, and utilization rates of 16 different types of capital" goods for each airline. This data on heterogeneous capital goods allows us to estimate the" desired stock of capital for each type of plane while controlling for unobserved changes in airline" profitability. The results show clear evidence of non-convex adjustment costs inaction for capital investment and quadratic adjustment costs conditional on positive or negative" investment. The adjustment costs for utilization show similar non-convexities but with smaller" adjustment costs. Aggregating to the firm level or using accounting data obscures the non-convexities and biases the estimated adjustment costs upward."

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6342.

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Date of creation: Dec 1997
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Handle: RePEc:nbr:nberwo:6342
Note: PE EFG
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  7. Russell Cooper & John Haltiwanger & Laura Power, 1995. "Machine Replacement and the Business Cycle: Lumps and Bumps," NBER Working Papers 5260, National Bureau of Economic Research, Inc.
  8. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
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  11. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
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  15. Hayashi, Fumio & Inoue, Tohru, 1991. "The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms," Econometrica, Econometric Society, vol. 59(3), pages 731-53, May.
  16. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September.
  17. Severin Borenstein, 1991. "The Dominant-Firm Advantage in Multiproduct Industries: Evidence from the U. S. Airlines," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1237-1266.
  18. Austan Goolsbee, 1998. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 121-148.
  19. Hamermesh, Daniel S, 1992. "A General Model of Dynamic Labor Demand," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 733-37, November.
  20. Blackorby, Charles & Schworm, William, 1983. " Aggregating Heterogeneous Capital Goods in Adjustment-Cost Technologies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(2), pages 207-22.
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