Modelling investment decisions of firms

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Project objective

Modelling Investment Decisions of Firms The purpose of this projects is to develop models that incorporate some new insights in the theory of investment and to take advantage of recent advances in econometric methodology when estimating these models and testing these new views on investment. For explaining investment, knowledge about the structure of the adjustment cost function is crucial. Whereas traditional dynamic models of investment relied on the assumption of convex adjustment costs, the recent literature stresses the importance of irreversibility and fixed adjustment costs. The latter type of adjustment cost is associated with lumpy adjustments of the stock of capital. Most data on investment at the firm level are aggregates of investments that are subject to different kinds of adjustment costs. To explain these data (e.g. from DATASTREAM for U.K. firms) we will combine various models that are based on different specifications of the adjustment costs. By following Pakes (1994), we can estimate the mixed discrete-continuous model of investment that results. For the inference, we will also allow for the possibility of exit of firms. Among other things we will investigate how the adjustment technologies vary across industries.

Original text from CORDIS.

Participants

• UNIVERSITY COLLEGE LONDON · LONDONCoordinatorUnited Kingdom
• Not availableCity levelNetherlands

Links

• View on CORDIS