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Irreversible Investment, Capital Costs and Productivity Growth: Implications for Telecommunications

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Author Info
Jeffrey I. Bernstein
Theofanis P. Mamuneas

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Abstract

This paper develops a model incorporating costly disinvestment and estimates the associated commitment premium required to invest in telecommunications. Results indicate that the irreversibility premium raises the opportunity cost of capital by 70 percent. This implies an average annual hurdle rate of return of 14 percent over the period 1986-2002. Irreversibility creates a distinction between observed and adjusted TFP growth. Observed growth, which omits the premium, annually averaged 2.8 percent from 1986 to 2002. This rate exceeded the (premium) adjusted TFP growth by 0.7 percentage points, and therefore average annual observed productivity growth overestimated the corrected rate by 33 percent.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13269.

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Date of creation: Jul 2007
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Handle: RePEc:nbr:nberwo:13269

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Find related papers by JEL classification:
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jeffrey I. Bernstein & Theofanis P. Mamuneas & Panos Pashardes, 2004. "Technical Efficiency and U.S. Manufacturing Productivity Growth," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 402-412, 04. [Downloadable!] (restricted)
  2. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December. [Downloadable!] (restricted)
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  4. Robert S. Pindyck, 2005. "Pricing Capital Under Mandatory Unbundling and Facilities Sharing," NBER Working Papers 11225, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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