Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/126622
Authors: 
Bachmann, Andreas
Year of Publication: 
2015
Series/Report no.: 
Discussion Papers, Universität Bern, Department of Economics 15-10
Abstract: 
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.
Subjects: 
lumpy investment
adjustment costs
reserve capacity
utilization
business cycles
JEL: 
E22
E32
D92
Document Type: 
Working Paper

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