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Behavior of business investment in the USA under variable and proportional rates of replacement

Listed author(s):
  • Bitros, George C.
  • Nadiri, M. Ishaq

Using data from the U. S. Bureau of Economic Analysis for the period 1947-2015, we test two investment models of neoclassical decent. Model A is based on the conceptualization that business firms have an active replacement investment policy, which renders the replacement rate a determinant of business investment behavior, whereas Model B is based on the traditional hypothesis that replacement investment is an engineering proportion of the capital stock, thus turning into a constant. The evidence that emerges from the estimations is heavily in favor of Model A on at least three grounds. Namely, first it establishes that the replacement rate is a decisive determinant of investment at all levels of aggregation; Second, it leads to estimates of investment equations with succinct short run and long run dynamics, thus facilitating policy applications; and thirdly, it gives rise to remarkably robust estimates of the elasticities of substitution of capital for labor, output and the replacement rate. When Model B is estimated for the period 1947-1960, it performs as expected, most likely because in short periods remains fairly constant due to long swings in replacement investment.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 80594.

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Date of creation: 18 Jul 2017
Handle: RePEc:pra:mprapa:80594
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  1. Eisner, Robert & Nadiri, M Ishaq, 1970. "Neoclassical Theory of Investment Behavior: A Comment," The Review of Economics and Statistics, MIT Press, vol. 52(2), pages 216-222, May.
  2. Brown, Murray & Chang, Winston W, 1976. "Capital Aggregation in a General Equilibrium Model of Production," Econometrica, Econometric Society, vol. 44(6), pages 1179-1200, November.
  3. Paul Zarembka, 1975. "Capital Heterogeneity, Aggregation, and the Two-Sector Model," The Quarterly Journal of Economics, Oxford University Press, vol. 89(1), pages 103-114.
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