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qGMM Estimation of Sunk Costs

Author

Listed:
  • Jeffrey R. Campbell
  • Jonas D.M. Fisher

Abstract

This paper estimates a structural model of firm growth and partially sunk investment. In the model, the firm's optimal adjustment keeps the gap between the actual capital stock and its frictionless counterpart between two boundaries. We show that any two quantiles of output growth conditional on the firm's history are sufficient to identify the sunk cost of investment, the firm's span of control, and the distribution of technology shocks; and we estimate these structural parameters using moment conditions based on these conditional quantiles. Because the optimal weighting matrix is known, our one-step GMM estimates are efficient. Furthermore, they require no parametric assumptions on the firm's idiosyncratic shocks. We apply this procedure to estimate the adjustment rule of COMINCO's electrolytic zinc refining facility in Trail, B.C

Suggested Citation

  • Jeffrey R. Campbell & Jonas D.M. Fisher, 2004. "qGMM Estimation of Sunk Costs," 2004 Meeting Papers 66, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:66
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    More about this item

    Keywords

    Quantile Estimation; Irreversible Investment;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • L72 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Other Nonrenewable Resources

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