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Extensive and Intensive Investment over the Business Cycle

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Author Info
Boyan Jovanovic
Peter L. Rousseau

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Abstract

Investment of U.S. firms responds asymmetrically to Tobin's Q: Investment of established firms -- intensive investment -- reacts negatively to Q whereas investment of new firms -- extensive investment -- responds positively and elastically to Q. This asymmetry, we argue, reflects a difference between established and new firms in the cost of adopting new technologies. A fall in the compatibility of new capital with old capital raises measured Q and reduces the incentive of established firms to invest. New firms do not face such compatibility costs and step up their investment in response to the rise in Q. A composite-capital version of the model fits the data well using aggregates since 1900 and our new database of firm-level Qs that extend back to 1920.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14960.

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Date of creation: May 2009
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Handle: RePEc:nbr:nberwo:14960

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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