NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Extensive and Intensive Investment over the Business Cycle

Boyan Jovanovic, Peter L. Rousseau

NBER Working Paper No. 14960
Issued in May 2009
NBER Program(s):   EFG   DAE   PR

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. The model fits the data well using aggregates since 1900.

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This paper was revised on December 5, 2011

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Document Object Identifier (DOI): 10.3386/w14960

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