Working Paper: NBER ID: w12845
Authors: Aubhik Khan; Julia Thomas
Abstract: We study a model of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity, and nonconvex adjustment costs lead them to pursue generalized (S,s) investment rules. We allow persistent heterogeneity in both capital and total factor productivity alongside low-level investments exempt from adjustment costs to develop the first model consistent with available evidence on establishment-level investment rates. Examining the implications of lumpy investment for aggregate dynamics in this setting, we find that they remain substantial when factor supply considerations are ignored, but are quantitatively irrelevant in general equilibrium. The substantial implications of general equilibrium extend beyond the dynamics of aggregate series. While the presence of idiosyncratic shocks makes the time-averaged distribution of plant-level investment rates largely invariant to market-clearing movements in real wages and interest rates, we show that the dynamics of plants' investments differ sharply in their presence. Thus, model-based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium. Our analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant. When establishments face idiosyncratic productivity shocks consistent with existing estimates, we find that nonconvex costs do not cause lumpy investments, but act to eliminate them.
Keywords: No keywords provided
JEL Codes: E22; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonconvex adjustment costs (D24) | eliminate lumpy investments (G11) |
| idiosyncratic shocks to productivity (O49) | influence plant-level investment decisions (G31) |
| nonconvex costs (D24) | skewed distribution of investment rates (D39) |
| market-clearing movements in real wages and interest rates (E49) | smooth out effects of lumpy investments (G11) |
| lumpy investments (G11) | affect aggregate investment dynamics (E22) |
| nonconvex costs (D24) | eliminate lumpy investments in general equilibrium (D52) |