Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application

33 Pages Posted: 31 Jan 2010

See all articles by John Haltiwanger

John Haltiwanger

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Jonathan L. Willis

Federal Reserve Bank of Kansas City

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2010

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 accumulation. 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: discrete choice, investement, nonconvex adjustment costs, Euler equation estimation, incomplete spells

JEL Classification: C13, D21, E22

Suggested Citation

Haltiwanger, John C. and Cooper, Russell W. and Willis, Jonathan, Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application (January 29, 2010). Available at SSRN: https://ssrn.com/abstract=1544461 or http://dx.doi.org/10.2139/ssrn.1544461

John C. Haltiwanger

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-3504 (Phone)
301-405-3542 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jonathan Willis

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States
816-881-2852 (Phone)
816-881-2199 (Fax)

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