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Extensive and Intensive Investment Over the Business Cycle

  • Boyan Jovanovic

    ()

    (Department of Economics, New York University)

  • Peter L. Rousseau

    ()

    (Department of Economics, Vanderbilt University)

Investment of U.S. firms responds asymmetrically to Tobin's Q: Investment of established firms -- `intensive' investment -- reacts negatively to Q whereas investment of new firms -- `extensive' investment -- responds positively and elastically to Q. This asymmetry, we argue, reflects a difference between established and new firms in the cost of adopting new technologies. A fall in the compatibility of new capital with old capital raises measured Q and reduces the incentive of established firms to invest. New firms do not face such compatibility costs and step up their investment in response to the rise in Q. A composite-capital version of the model fits the data well using aggregates since 1900 and our new database of firm-level Qs that extend back to 1920.

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File URL: http://www.accessecon.com/pubs/VUECON/vu09-w12.pdf
File Function: First version, 2009
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0912.

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Date of creation: Sep 2009
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Handle: RePEc:van:wpaper:0912
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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