Working Paper: NBER ID: w15675
Authors: Russell Cooper; John C. Haltiwanger; Jonathan L. Willis
Abstract: This paper studies capital adjustment at the establishment level. Our goal is to characterize capital adjustment costs, which are important for understanding both the dynamics of aggregate investment and the impact of various policies on capital accu- mulation. Our estimation strategy searches for parameters that minimize ex post errors in an Euler equation. This strategy is quite common in models for which adjustment occurs in each period. Here, we extend that logic to the estimation of parameters of dynamic optimization problems in which non-convexities lead to extended periods of investment inactivity. In doing so, we create a method to take into account censored observations stemming from intermittent investment. This methodology allows us to take the structural model directly to the data, avoiding time-consuming simulation- based methods. To study the effectiveness of this methodology, we first undertake several Monte Carlo exercises using data generated by the structural model. We then estimate capital adjustment costs for U.S. manufacturing establishments in two sectors.
Keywords: No keywords provided
JEL Codes: C15; C24; C25; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Methodology (C90) | Validation of estimates of adjustment costs (C51) |
| Estimation strategy (C51) | Capital adjustment costs (G31) |
| Capital adjustment costs (G31) | Aggregate investment dynamics (E22) |
| Estimation approach (C13) | Accuracy of capital cost assessments (G31) |
| Euler-equation-based methodology (C69) | Evidence of quadratic and nonconvex adjustment costs (D24) |
| Less irreversibility and smaller disruption costs (D23) | Nuanced understanding of capital dynamics (P12) |