TY  - JOUR
AU  - Bertola,Giuseppe
AU  - Caballero,Ricardo J.
TI  - Irreversibility and Aggregate Investment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3865
PY  - 1991
Y2  - October 1991
UR  - http://www.nber.org/papers/w3865
L1  - http://www.nber.org/papers/w3865.pdf
N1  - Author contact info:
Giuseppe Bertola
EDHEC
393 promenade des anglais
F-06202 Nice 
E-Mail: giuseppe.bertola@edhec.edu

Ricardo J. Caballero
MIT
Department of Economics
Room E52-373a
Cambridge, MA 02142-1347
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu
AB  - Investment is often irreversible, in that installed capital has little or no value unless used in production. In the presence of ongoing uncertainty, an individual firm's irreversible investment policy optimally alternates short bursts of positive gross investment to periods of inaction, when the installed capital stock is allowed to depreciate. The behavior of aggregate investment series is characterized by sluggish, continuous adjustment instead. We argue in this paper that aggregate dynamics should be interpreted in terms of unsynchronized irreversible investment decisions by heterogenous firms, rather than in terms of ad-hoc adjustment cost functions in a representative-agent framework. We propose a closed-form solution for a realistic model of sequential irreversible investment, characterize the aggregate implications of microeconomic irreversibility and idiosyncratic uncertainty, and interpret U.S. data in light of the theoretical results.
ER  -