Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Mar, 2008, Volume 76, Issue 2

Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics
p. 395-436

Aubhik Khan, Julia K. Thomas

We study a model of lumpy investment wherein establishments face persistent shocks to common and plant‐specific productivity, and nonconvex adjustment costs lead them to pursue generalized (, ) investment rules. We allow persistent heterogeneity in both capital and total factor productivity alongside low‐level investments exempt from adjustment costs to develop the first model consistent with the cross‐sectional distribution of establishment investment rates. Examining the implications of lumpy investment for aggregate dynamics in this setting, we find that they remain substantial when factor supply considerations are ignored, but are quantitatively irrelevant in general equilibrium.

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