Extensive and Intensive Investment over the Business Cycle
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.
We thank G. Alessandria, W. Brainard, R. Lucas, G. Violante and L. Wong for comments, and S. Bigio, S. Flynn, H. Tretvoll and V. Tsyrennikov for research assistance, and the Ewing Marion Kauffman Foundation for financial assistance. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Boyan Jovanovic & Peter L. Rousseau, 2014. "Extensive and Intensive Investment over the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 122(4), pages 863 - 908. citation courtesy of