Structural identification of high and low investment regimes

The Timing of Investment Episodes in the Netherlands

“…In a small number of consecutive years the investment is very high whereas in the years surrounding this investment lump it is much lower. This result has been confirmed for other countries as well (for Norway see NS; for the Netherlands see Letterie and Pfann (2006)). These empirical observations are refuting the convex adjustment cost assumption.…”

“…Rather it is consistent with a non convex shape. For instance, it seems firms incur a fixed adjustment cost which is independent of the size of the investment expenditure which leads to the spikes observed in the investment data (see Abel and Eberly (1994), Letterie and Pfann (2006)). …”

“…Evidence in favour of departures from the traditional assumption of linear quadratic adjustment costs is provided by Barnett and Sakellaris (1998), NS (i.e. Nilsen and Schiantarelli (2003)), Letterie and Pfann (2006) and Letterie et al (2004) who show that the response of investment to fundamentals is non-linear. Evidence supporting the presence of a fixed component to the adjustment cost function is presented by for instance Doms and Dunne (1998) who show that firms tend to concentrate large investment outlays in a very short time period.…”

Sequentiality Versus Simultaneity: Interrelated Factor Demand

“…However, from the expressions depicted in the appendix it can be observed that Furthermore, in line with Nilsen and Schiantarelli (2003) and Letterie and Pfann (2007) easier for the firm's management to observe lagged rather than contemporaneous information. Secondly, another advantage is that lagging these variables reduces problems due to endogeneity.…”

Extent and intensity of investment with multiple capital goods

“…The intermittent behavior of investment decisions arising due to nonconvexities in the adjustment cost function such as irreversibility and fixed costs has been firmly explained by economic theory (McDonald and Siegel 1986;Pindyck 1988;Dixit and Pindyck 1994;Caballero and Engel 1999) 1 and also empirically verified (Doms and Dunne 1998;Barnett and Sakellaris 1999;Gelos and Isgut 2001;Nilsen and Schiantarelli 2003;Bontempi et al 2004;Sakellaris 2004;Wilson 2004;Cooper and Haltiwanger 2006;Letterie and Pfann 2006). In such contexts, the business fixed investment state-space corresponds to three regimes where the decision maker either initiates positive or negative investment or stays put Eberly 1994, 1996;.…”