Working Paper: NBER ID: w14960
Authors: Boyan Jovanovic; Peter L. Rousseau
Abstract: 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. The model fits the data well using aggregates since 1900.
Keywords: Investment; Tobin's q; Business cycle; Firm behavior
JEL Codes: E22; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tobin's q (G19) | Investment of established firms (D25) |
| Tobin's q (G19) | Investment of new firms (M13) |
| Compatibility costs (L15) | Investment of established firms (D25) |
| Compatibility costs (L15) | Investment of new firms (M13) |