Uncertainty, depreciation and industry growth
When investment is irreversible, firms invest only when the mismatch between their productivity and their capital stock is large. This suggests that two factors should be related to the frequency of mismatch: volatility and capital depreciation. A canonical model of industry dynamics with investment...
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| Main Authors: | , |
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| Format: | text |
| Language: | English |
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Institutional Knowledge at Singapore Management University
2019
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| Subjects: | |
| Online Access: | https://ink.library.smu.edu.sg/soe_research/2333 https://ink.library.smu.edu.sg/context/soe_research/article/3332/viewcontent/Uncertainty_depreciation_IG_pv.pdf |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | When investment is irreversible, firms invest only when the mismatch between their productivity and their capital stock is large. This suggests that two factors should be related to the frequency of mismatch: volatility and capital depreciation. A canonical model of industry dynamics with investment irreversibility displays slow growth in times of high uncertainty, and decline is particularly pronounced in industries where capital depreciation is rapid. A differences-in-differences regression using industry growth data from a large sample of countries supports this result. |
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