Irreversible Investment, Capital Costs and Productivity Growth: Implications for Telecommunications

Jeffrey I. Bernstein and Theofanis P. Mamuneas ()

No 13269, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a model incorporating costly disinvestment and estimates the associated commitment premium required to invest in telecommunications. Results indicate that the irreversibility premium raises the opportunity cost of capital by 70 percent. This implies an average annual hurdle rate of return of 14 percent over the period 1986-2002. Irreversibility creates a distinction between observed and adjusted TFP growth. Observed growth, which omits the premium, annually averaged 2.8 percent from 1986 to 2002. This rate exceeded the (premium) adjusted TFP growth by 0.7 percentage points, and therefore average annual observed productivity growth overestimated the corrected rate by 33 percent.

JEL-codes: D24 L96 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff
Date: Written
Note: PR IO EFG
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Journal Article: Irreversible Investment, Capital Costs and Productivity Growth: Implications for Telecommunications (2007)
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