Behavior of Business Investment in the USA Under Variable and Proportional Rates of Replacement

21 Pages Posted: 1 Aug 2017 Last revised: 3 Aug 2017

See all articles by Georgios (George) C. Bitros

Georgios (George) C. Bitros

Athens University of Economics and Business - Department of Economics

M. Ishaq Nadiri

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 31, 2017

Abstract

Using data from the U. S. Bureau of Economic Analysis for the period 1947-2015, we test two investment models of neoclassical decent. Model A is based on the conceptualization that business firms have an active replacement investment policy, which renders the replacement rate a determinant of business investment behavior, whereas Model B is based on the traditional hypothesis that replacement investment is an engineering proportion of the capital stock, thus turning into a constant. The evidence that emerges from the estimations is heavily in favor of Model A on at least three grounds. Namely, first it establishes that the replacement rate is a decisive determinant of investment at all levels of aggregation; Second, it leads to estimates of investment equations with succinct short run and long run dynamics, thus facilitating policy applications; and thirdly, it gives rise to remarkably robust estimates of the elasticities of substitution of capital for labor, output and the replacement rate. When Model B is estimated for the period 1947-1960, it performs as expected, most likely because in short periods remains fairly constant due to long swings in replacement investment.

Keywords: Neoclassical Models of Business Investment, Elasticities of Substitution and Output, Modes of Replacement Investment

JEL Classification: E22, E52, E62

Suggested Citation

Bitros, Georgios (George) C. and Nadiri, M. Ishaq, Behavior of Business Investment in the USA Under Variable and Proportional Rates of Replacement (July 31, 2017). Available at SSRN: https://ssrn.com/abstract=3011204 or http://dx.doi.org/10.2139/ssrn.3011204

Georgios (George) C. Bitros (Contact Author)

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
Athens, 10434
Greece
030 210 8203740 (Phone)
030 210 8070545 (Fax)

M. Ishaq Nadiri

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States
212-998-8968 (Phone)
212-995-4013 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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