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ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >
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http://hdl.handle.net/10419/26310
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| Title: | | The irreversibility premium  |
| Authors: | | Chirinko, Robert S. Schaller, Huntley |
| Issue Date: | | 2008 |
| Series/Report no.: | | CESifo working paper 2265 |
| Abstract: | | When investment is irreversible, theory suggests that firms will be reluctant to invest. This reluctance creates a wedge between the discount rate guiding investment decisions and the standard Jorgensonian user cost (adjusted for risk). We use the intertemporal tradeoff between the benefits and costs of changing the capital stock to estimate this wedge, which we label the irreversibility premium. Estimates are based on panel data for the period 1980-2001. The large dataset allows us to estimate the effects of limited resale markets, low depreciation rates, high uncertainty, and negative industry-wide shocks on the irreversibility premium. Our estimates provide a readily interpretable measure of the importance of irreversibility and document that the irreversibility premium is both economically and statistically significant. |
| Subjects: | | irreversibility investment non-convex adjustment costs |
| JEL: | | E22 E32 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CESifo Working Papers, CESifo Group Munich
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