On the Nature of Capital Adjustment Costs
38 Pages Posted: 25 Sep 2000 Last revised: 19 Oct 2010
Date Written: September 2000
This paper studies the nature of capital adjustment at the plant-level. We use an indirect inference procedure to estimate the structural parameters of a rich specification of capital adjustment costs. In effect, the parameters are optimally chosen to reproduce the nonlinear relationship between investment and profitability that we uncover in the plant-level data. Our findings indicate that a model which mixes both convex and nonconvex adjustment costs with irreversibility fits the data best.
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