On Lumpiness in the Replacement and Expansion of Capital

19 Pages Posted: 19 Apr 2010

See all articles by Wilko H. Letterie

Wilko H. Letterie

Maastricht School of Business and Economics; Maastricht University

Gerard A. Pfann

Maastricht University; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Sher Verick

International Labour Organization (ILO); IZA Institute of Labor Economics

Date Written: 2010-01-05

Abstract

We estimate a model of homogeneous capital investment with two installation possibilities – replacement and expansion using observations at the establishment level. We find that regime switches identified by ad hoc measures of lumpy investment do not adequately distinguish expansionary from replacement activities. In fact, during periods of expansion, firms spend just as much on replacement capital. Also, using the common 20% rule would not assign a spike to almost 65% of all observations that include expansionary investment in this dataset. Finally, replacement although less responsive to fundamentals than expansions cannot be regarded as an autonomous part of investment.

Suggested Citation

Letterie, Wilko H. and Pfann, Gerard Antonie and Verick, Sher, On Lumpiness in the Replacement and Expansion of Capital (2010-01-05). Oxford Bulletin of Economics and Statistics, Vol. 72, Issue 3, pp. 263-281, June 2010, Available at SSRN: https://ssrn.com/abstract=1590528 or http://dx.doi.org/10.1111/j.1468-0084.2009.00577.x

Wilko H. Letterie (Contact Author)

Maastricht School of Business and Economics ( email )

P.O. Box 616
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Maastricht University

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Gerard Antonie Pfann

Maastricht University ( email )

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Netherlands
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Centre for Economic Policy Research (CEPR)

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

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Sher Verick

International Labour Organization (ILO) ( email )

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Switzerland

IZA Institute of Labor Economics ( email )

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Bonn, D-53072
Germany

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