A Structural Model of Asymmetric Lumpy Investment

Abstract:

Firms’ capital investments are lumpy and asymmetric, with disinvestments being less frequent and smaller than positive investments. We present a tractable model that reproduces the observed frequency and size distribution of investments by assuming that capital investment is subject to random fixed costs. We provide an inverse map to recover the model’s primitives: in particular, we use the size distribution of investment to identify the underlying distribution of adjustment costs, as well as other fundamen- tal parameters such as the drift and volatility of the firm’s productivity. We apply the method to panel data on investments by Italian firms. We use the identified model to quantify the capital adjustment costs and to document their asymmetric nature: disinvestments are more costly than investments. We explore the extent to which these asymmetries imply a non-linear propagation of aggregate productivity shocks.