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Lumpy investment and variable capacity utilization: firm-level and macroeconomic implications

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  • Andreas Bachmann

Abstract

Abstract The macroeconomic implications of firms' lumpy investment behavior are subject to ongoing research. Lumpy investment results from fixed capital adjustment costs which give firms an incentive to reduce the frequency of capital adjustments. However, previous studies have underestimated the lumpiness. Their assumption of constant capital utilization reduces firms' incentives to undertake large investments as it prevents reserve capacity building. This paper shows that if capacity utilization is allowed to vary, firms optimally undertake larger investments and leave parts of the new capital stock idle for some periods, thereby reducing the frequency of investment activities. Using a dynamic stochastic general equilibrium model with fixed capital adjustment costs, heterogeneous firms, variable utilization, and aggregate technology shocks, I numerically compute firms' optimal decisions on investment, utilization and labor demand. Compared to the constant utilization model, the findings reveal magnified investment lumpiness: Firms adjust capital less frequently, but invest more when they adjust. However, this appears to be of minor macroeconomic relevance: Moments and impulse responses of macroeconomic quantities change in a similar way when variable utilization is introduced in a lumpy or in a frictionless model. New empirical evidence based on firm-level panel data confirms some of the theoretical findings.

Suggested Citation

  • Andreas Bachmann, 2015. "Lumpy investment and variable capacity utilization: firm-level and macroeconomic implications," Diskussionsschriften dp1510, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp1510
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    More about this item

    Keywords

    lumpy investment; adjustment costs; reserve capacity; utilization; business cycles;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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