Extensive and Intensive Investment Over the Business Cycle

Boyan Jovanovic () and Peter Rousseau ()

No 912, Working Papers from Department of Economics, Vanderbilt University

Abstract: Investment of U.S. firms responds asymmetrically to Tobin's Q: Investment of established firms -- `intensive' investment -- reacts negatively to Q whereas investment of new firms -- `extensive' investment -- responds positively and elastically to Q. This asymmetry, we argue, reflects a difference between established and new firms in the cost of adopting new technologies. A fall in the compatibility of new capital with old capital raises measured Q and reduces the incentive of established firms to invest. New firms do not face such compatibility costs and step up their investment in response to the rise in Q. A composite-capital version of the model fits the data well using aggregates since 1900 and our new database of firm-level Qs that extend back to 1920.

Keywords: Compatibility costs; composite capital; vintage capital; Tobin's Q; 20th century investment (search for similar items in EconPapers)
JEL-codes: E3 N1 O3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-ent, nep-his, nep-mac and nep-pke
Date: 2009-09
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http://www.vanderbilt.edu/Econ/wparchive/workpaper/vu09-w12.pdf First version, 2009 (application/pdf)

Related works:
Working Paper: Extensive and Intensive Investment over the Business Cycle (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:van:wpaper:0912

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