Lumpy investment and variable capacity utilization: firm-level and macroeconomic implications

Bachmann, Andreas (September 2015). Lumpy investment and variable capacity utilization: firm-level and macroeconomic implications (Discussion Papers 15-10). Bern: Department of Economics

Preview

Text dp1510.pdf - Published Version Available under License Creative Commons: Attribution (CC-BY). Download (862kB) | Preview

The macroeconomic implications of firms’ lumpy investment behavior are subject to
ongoing research. Lumpy investment results from fixed capital adjustment costs which
give firms an incentive to reduce the frequency of capital adjustments. However, previous studies have underestimated the lumpiness. Their assumption of constant capital utilization reduces firms’ incentives to undertake large investments as it prevents reserve capacity building. This paper shows that if capacity utilization is allowed to vary, firms optimally undertake larger investments and leave parts of the new capital stock idle for some periods, thereby reducing the frequency of investment activities. Using a dynamic stochastic general equilibrium model with fixed capital adjustment costs, heterogeneous firms, variable utilization, and aggregate technology shocks, I numerically compute firms’ optimal decisions on investment, utilization and labor demand. Compared to the constant utilization model, the findings reveal magnified investment lumpiness: Firms adjust capital less frequently, but invest more when they adjust. However, this appears to be of minor macroeconomic relevance: Moments and impulse responses of macroeconomic quantities change in a similar way when variable utilization is introduced in a lumpy or in a frictionless model. New empirical evidence based on firm-level panel data confirms some of the theoretical findings.

Interest & Impact

Downloads

26 since deposited on 28 Dec 2020
7 in the past 12 months

Citations

5 Citations in Web of Science ®
6 Citations in Scopus

Search

in Google Scholar™

Services

Actions (login required)

Edit item

Actions (login required)

Edit item