TY - JOUR AU - Khan,Aubhik AU - Thomas,Julia TI - Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics JF - National Bureau of Economic Research Working Paper Series VL - No. 12845 PY - 2007 Y2 - January 2007 UR - http://www.nber.org/papers/w12845 L1 - http://www.nber.org/papers/w12845.pdf N1 - Author contact info: Aubhik Khan Department of Economics Ohio State University 410 Arps Hall 1945 N. High Street Columbus, OH 43210 Tel: 614 247 0097 E-Mail: mail@aubhik-khan.net Julia Thomas Department of Economics The Ohio State University 410 Arps Hall 1945 N High Street Columbus, OH 43210 E-Mail: mail@juliathomas.net AB - We study a model of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity, and nonconvex adjustment costs lead them to pursue generalized (S,s) investment rules. We allow persistent heterogeneity in both capital and total factor productivity alongside low-level investments exempt from adjustment costs to develop the first model consistent with available evidence on establishment-level investment rates. Examining the implications of lumpy investment for aggregate dynamics in this setting, we find that they remain substantial when factor supply considerations are ignored, but are quantitatively irrelevant in general equilibrium. The substantial implications of general equilibrium extend beyond the dynamics of aggregate series. While the presence of idiosyncratic shocks makes the time-averaged distribution of plant-level investment rates largely invariant to market-clearing movements in real wages and interest rates, we show that the dynamics of plants' investments differ sharply in their presence. Thus, model-based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium. Our analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant. When establishments face idiosyncratic productivity shocks consistent with existing estimates, we find that nonconvex costs do not cause lumpy investments, but act to eliminate them. ER -