Investment Dynamics with Information Costs
42 Pages Posted: 28 Sep 2013 Last revised: 2 Dec 2014
Date Written: August 28, 2013
Investment in physical capital at the micro level is infrequent and large, or lumpy. The most common explanation for this is that firms face non-convex physical adjustment costs. The model developed in this paper shows that information costs make investment lumpy at the micro level, even in the absence of non-convex adjustment costs. When collecting and processing information is costly, the firm optimally chooses to do it sporadically and to be inactive most of the time. This behavior results in infrequent and possibly large capital adjustments. The model fits plant-level investment rate moments well, and it also matches some higher order moments of aggregate investment rates.
Keywords: investment dynamics, information costs, inattentiveness, lumpy investment
JEL Classification: D21, D83, D92, E22
Suggested Citation: Suggested Citation