That Elusive Elasticity: A Long-Panel Approach To Estimating The Price Sensitivity Of Business Capital

Bob Chirinko, Steven Fazzari and Andrew P. Meyer ()
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Andrew P. Meyer: Federal Reserve Bank of St. Louis, Postal: Federal Reserve Bank of St. Louis, St. Louis, Missouri USA, 63166-0442

No B3-1, 10th International Conference on Panel Data, Berlin, July 5-6, 2002 from International Conferences on Panel Data

Abstract: The sensitivity of business capital formation to its user cost plays a key role in the analysis of many economic issues. Although this elasticity has been the subject of an enormous number of studies, a consensus remains elusive. We develop an estimation strategy that exploits panel data in an original way and avoids several pitfalls - difficult-to-specify dynamics, transitory time-series variation, and positively sloped supply schedules - inherent in investment equations that can bias the estimated elasticity. Results are based on an extensive panel containing 1,860 manufacturing and non-manufacturing firms. Our model generates a precisely estimated user cost elasticity of approximately 0.40. The method developed here may prove useful in estimating other structural parameters from panel datasets.

Date: 2002-01
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