Corporate investment, irreversibilities and lumpiness : an empirical model

Abstract

We study the role of irreversibility and non convexities in firm investment decisions. For such purpose, we posit a dynamic structural investment model with irreversibility and nonconvex adjustment costs. We focus on the firm decision about whether to invest or not, which is characterized by means of a discrete choice dynamic programming problem. The adjustment cost parameters behind the investment decision are estimated with a longitudinal sample of Spanish manufacturing firms between 1990 and 2002. For these firms, we confirm that inaction and investment episodes account for a significant fraction of them. As estimation procedure, we apply the Nested Pseudo-Likelihood (NPL) algorithm by Aguirregabiria and Mira (2002).