Time-To-Build and Convex Adjustment Costs

Time-To-Build and Convex Adjustment Costs

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This paper incorporates time-to-build into the standard investment model with convex adjustment costs. The empirical Euler equation is estimated using a U.S. firm-level panel from Compustat. In spite of the introduction of time-to-build, the magnitude of the implied adjustment costs is unrealistically high. Exploiting another approach, I test directly the restrictions imposed by time-to-build on the investment equation. The results indicate that these restrictions cannot be rejected for five of the sixteen industries in the sample. Finally I show that time-to-build can explain approximately one-third of the variation in persistence of structure investment across four-digit industries.Since all expectations about the fL1lIl.l1a#39;6 are incorporated in the contemporaneous value of marginal q, the theoretical investment equation does not contain any lagged (or any other) variables. The adjustment costs parameter 7a#39; can beanbsp;...

Title:Time-To-Build and Convex Adjustment Costs
Author:Petya Koeva Brooks
Publisher:International Monetary Fund - 2001-01-01


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