Abstract
Using insights obtained from Newey’s (1994) series estimator and a novel restatement of the q-theory that additively separates the marginal adjustment cost term in the canonical model, I model and estimate the shape of the marginal adjustment cost function. I discuss the issues in specification and identification in details, focusing particularly on the misspecification due to the q-ratio being an insufficient statistic for determining investment. The function recovered from the Indian 2014 WBES data can explain both lumpy and serially correlated investment.
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Notes
Hayashi (1982) relates the two measures by showing that under perfect competition in the output market and homothetic adjustment cost, the marginal and average measures of q are equivalent.
The cost-free level of investment \(v\) on the right-hand side is assumed away, which simply pushes the constant term upward. Excess capacity can be shown to absorb any effects of \(v\), see Cooper (2006). In the latter parts of the text, I bring it back and even try to calculate it from the reduced-form parameters.
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Khan, M.N. Estimating empirical marginal adjustment cost function: a power series approach. Empir Econ 63, 3185–3210 (2022). https://doi.org/10.1007/s00181-022-02232-6
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DOI: https://doi.org/10.1007/s00181-022-02232-6