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Estimation of a dynamic structural model of irreversible investment

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  • Rocio Sanchez

Abstract

In this paper we propose and estimate a dynamic structural model of fixed capital investment using firm-level Spanish data. We first characterize the optimal behavior of a firm facing uncertainty in demand and input prices, as well as kinked and lump-sum adjustment costs. This nonconvex adjustment cost structure is suggested by the observed evidence of inaction and lumpiness in microeconomic investment data. The optimal decision rule we derive is then used to specify a microeconometric discrete choice model. Our estimation method consists on a nested algorithm. The outer algorithm maximizes the likelihood function in each iteration in the search of the structural parameters. The inner algorithm computes the difference in conditional value functions from the nonparametric estimation of conditional choice probabilities. Thus, our method fits into the literature on structural estimation that avoids the solution of the dynamic programming problem. This estimation exercise is implemented on a dataset consisting on an unbalanced panel of 3060 Spanish manufacturing firms for the period 1990-1997.

Suggested Citation

  • Rocio Sanchez, 2001. "Estimation of a dynamic structural model of irreversible investment," Computing in Economics and Finance 2001 163, Society for Computational Economics.
  • Handle: RePEc:sce:scecf1:163
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    References listed on IDEAS

    as
    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under imperfect competition," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 183-209, June.
    2. Robert Shimer, 2004. "The Consequences of Rigid Wages in Search Models," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 469-479, 04/05.
    3. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 2001. "The welfare cost of business cycles revisited: Finite lives and cyclical variation in idiosyncratic risk," European Economic Review, Elsevier, vol. 45(7), pages 1311-1339.
    4. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Structural estimation; applied microeconometrics; investment models; nonconvex adjustment costs;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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