Non-Linearities in the Expansion of Capital Stock

33 Pages Posted: 20 May 2004

See all articles by Sher Verick

Sher Verick

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

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)

Date Written: May 2004

Abstract

The empirical identification of non-linearities in investment relies on how investment is assumed to be separated into various regimes. Using German establishment-level panel data, we estimate a two-regime model of replacement and expansion investment which allows us to observe regime separation, an aspect of the data that is typically absent from previous empirical studies. Our results indicate that firms tend to spread the expansion of capital stock over a period of years rather than concentrating investment in a single year. Moreover, there is evidence that investment is more sensitive to fundamentals in the high regime, where establishments both replace and expand capital stock, than in the low regime, where they only invest in replacement. Finally, correcting for endogenous sample selection indicates that this source of bias does not affect the coefficient estimates significantly.

Keywords: investment, non-convex adjustment costs, sample selection bias, panel data

JEL Classification: E22, C23, C24

Suggested Citation

Verick, Sher and Letterie, Wilko H. and Pfann, Gerard Antonie, Non-Linearities in the Expansion of Capital Stock (May 2004). Available at SSRN: https://ssrn.com/abstract=545664

Sher Verick (Contact Author)

International Labour Organization (ILO) ( email )

Route des Morillons 4
Geneva, 1211
Switzerland

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Wilko H. Letterie

Maastricht School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
31-43-3883645 (Phone)
31-43-3213137 (Fax)

Maastricht University

P.O. Box 616
Maastricht, 6200MD
Netherlands

Gerard Antonie Pfann

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-43-388 3832 (Phone)
+31-43-388 4856 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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

P.O. Box 7240
Bonn, D-53072
Germany

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