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Fixed Costs and Long-lived Investments
| Content Provider | Semantic Scholar |
|---|---|
| Copyright Year | 2007 |
| Abstract | Neoclassical investment models predict that firms should make frequent, small adjustments to their capital stocks. Microeconomic evidence, however, shows just the opposite – firms make infrequent, large adjustments to their capital stocks. In response, researchers have developed models with fixed costs of adjustment to explain the data. While these models generate the observed firm-level investment behavior, it is not clear that the aggregate behavior of these models differs importantly from the aggregate behavior of neoclassical models. This is important since most of our existing understanding of investment is based on models without fixed costs. Moreover, models with fixed costs have non-degenerate, time-varying distributions of capital holdings across firms, making the models extremely difficult to analyze. This paper shows that, for sufficiently long-lived capital, (1) the cross-sectional distribution of capital holdings has virtually no bearing on the equilibrium and (2) the aggregate behavior of the fixedcost model is virtually identical to the neoclassical model. The findings are due to the near infinite elasticity of investment timing for long-lived capital – a feature that the fixed-cost model and the neoclassical models have in common. The analysis shows that the so-called “irrelevance results” obtained in recent numerical studies of fixed-cost models are not parametric special cases but instead are fundamental properties of investment in long-lived capital. * I gratefully acknowledge the comments of Lutz Kilian, John Leahy, Matthew Shapiro, Gianluca Violante, Caroline Weber, and seminar participants at the University of Michigan, the Ohio State University, the Federal Reserve Bank of New York, New York University and NYU Stern. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://public.econ.duke.edu/~staff/wrkshop_papers/2009-2010_Papers/1-7%20%20Chris%20House%20Paper.pdf |
| Alternate Webpage(s) | http://www.econ.duke.edu/uploads/assets/Workshop%20Papers/1-7%20%20Chris%20House%20Paper.pdf |
| Alternate Webpage(s) | http://www-personal.umich.edu/~chouse/papers/Fixed_Costs_12_18_07.pdf |
| Alternate Webpage(s) | http://www-personal.umich.edu/~chouse/papers/Fixed_Costs_11_14_07.pdf |
| Alternate Webpage(s) | https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=NASM2008&file_type=slides&paper_id=285 |
| Language | English |
| Access Restriction | Open |
| Subject Keyword | Abnormal degeneration Aggregate data Analysis of algorithms Approximation algorithm Arabic numeral 0 Cross-sectional data Depreciation Elasticity (cloud computing) Elasticity (data store) Epidermodysplasia Verruciformis Financial cost Foundations Jack Lutz Kind of quantity - Equilibrium Manufactured Supplies Marginal model Movement Nash equilibrium Numerical analysis Purchasing Relevance Semantic heterogeneity Shock Smoothing (statistical technique) Steady state Substitution (logic) Theory slope |
| Content Type | Text |
| Resource Type | Article |
