Working Paper: NBER ID: w13269
Authors: Jeffrey I. Bernstein; Theofanis P. Mamuneas
Abstract: This paper develops a model incorporating costly disinvestment and estimates the associated commitment premium required to invest in telecommunications. Results indicate that the irreversibility premium raises the opportunity cost of capital by 70 percent. This implies an average annual hurdle rate of return of 14 percent over the period 1986-2002. Irreversibility creates a distinction between observed and adjusted TFP growth. Observed growth, which omits the premium, annually averaged 2.8 percent from 1986 to 2002. This rate exceeded the (premium) adjusted TFP growth by 0.7 percentage points, and therefore average annual observed productivity growth overestimated the corrected rate by 33 percent.
Keywords: Irreversible Investment; Telecommunications; Productivity Growth; Opportunity Cost of Capital
JEL Codes: D24; L96
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment Irreversibility (G31) | Opportunity Cost of Capital (G31) |
| Opportunity Cost of Capital (G31) | Commitment Premium (G19) |
| Commitment Premium (G19) | User Cost of Capital (G31) |
| Commitment Premium (G19) | TFP Growth (O49) |
| Observed TFP Growth (O49) | Adjusted TFP Growth (O49) |