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The Embodiment of Intangible Investment Goods: a Q-Theory Approach

  • Nazim Belhocine

    ()

    (International Monetary Fund)

Recent empirical findings on firms’ expenditure towards the creation and acquisition of knowledge goods, otherwise known as intangibles, suggest that their share in overall investment has grown considerably. Still, intangible investment is rarely present in investment models. In this paper, I extend the q-theory of investment to model explicitly the decision of firms to invest in intangibles. I then use the model to measure the contribution of intangible goods to the overall capital stock in the U.S. The model highlights the embodiment of intangible goods in tangibles and the role of relative price movements in the measurement of the contribution of each type of investment to the overall capital stock. In particular, given that the relative cost of the main input to intangible production, skilled labor, rose substantially in the 80s and 90s, the price of intangibles inherits this rise. As a result, the downward trend in the aggregate investment deflator series reported by national accounts, which accounts only for the presence of tangible investment goods, is found to have a significant downward bias in the 90s. The model also shows that the growth in the overall capital stock from the late-80s until 2000 was driven mainly by an increase in the contribution of intangibles. However, the contribution of intangibles fell consistently after 2000. These results underscore the importance of accounting for the movements in the price of intangibles rather than focusing only on their rising share in overall investment.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1217.pdf
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1217.

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Length: 44 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:qed:wpaper:1217
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