Investment Dynamics with Information Costs

42 Pages Posted: 28 Sep 2013 Last revised: 2 Dec 2014

Fabio Verona

Bank of Finland - Research

Date Written: August 28, 2013

Abstract

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

Verona, Fabio, Investment Dynamics with Information Costs (August 28, 2013). Bank of Finland Research Discussion Paper No. 18/2013; Journal of Money, Credit, and Banking, Vol. 46, No. 8, 2014. Available at SSRN: https://ssrn.com/abstract=2331220 or http://dx.doi.org/10.2139/ssrn.2331220

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