Investment dynamics with information costs

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Title: Investment dynamics with information costs
Author: Verona, Fabio
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 18/2013
Year of publication: 2013
Publication date: 28.8.2013
Published in: Published in Journal of Money, Credit and Banking, Volume 46, Issue 8, December 2014:1627–1656
Pages: 42 s.
Keywords: investoinnit; informaatio; kustannukset; yritykset; mallit;
JEL: D21; D83; D92; E22
Abstract: Investment in physical capital at the micro level is infrequent and large, or lumpy. The most common explanation for this is that firms face non-convex physical adjustment costs. The model developed in this paper shows that information costs make investment lumpy at the micro level, even in the absence of non-convex adjustment costs. When collecting and processing information is costly, the firm optimally chooses to do it sporadically and to be inactive most of the time. This behavior results in infrequent and possibly large capital adjustments. The model fits plant-level investment rate moments well, and it also matches some higher order moments of aggregate investment rates. Keywords: investment dynamics, information costs, inattentiveness, lumpy investment JEL classification: D21, D83, D92, E22

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