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Heterogeneous Investment Dynamics of Manufacturing Firms

Author

Listed:
  • Tiago Tavares

    (CIE ITAM)

  • Alexandros Fakos

    (ITAM)

Abstract

In this paper we study firm-level investment dynamics by incorporating an idiosyncratic investment cost shock in a dynamic investment model of heterogeneous firms with adjustment costs. We interpret this idiosyncratic shock as an investment wedge summarizing firm deviations from model implied efficient behavior. We estimate our dynamic model using data micro-level data of Greek manufacturing firms, allowing for firms to be heterogenous in both profitability and investment cost. Our estimation results show that the level of dispersion of the idiosyncratic investment shock is of the same order of magnitude as the profitability shock which tends to be substantial in most micro-studies. We also find evidence that the investment wedge is correlated with variables not explicitly taken into account by our model such as measures of firm-level leverage and export intensity. This suggests that a financial channel in models of capital accumulation may be crucial in explaining data patterns.

Suggested Citation

  • Tiago Tavares & Alexandros Fakos, 2017. "Heterogeneous Investment Dynamics of Manufacturing Firms," 2017 Meeting Papers 1597, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1597
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    References listed on IDEAS

    as
    1. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1999. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Econometrica, Econometric Society, vol. 67(4), pages 783-826, July.
    2. Francisco J. Buera & Benjamin Moll, 2015. "Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 1-42, July.
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