Research Discussion Papers, Bank of Finland
Investment dynamics with information costs
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; (follow links to similar papers)
JEL-Codes: D21; D83; D92; E22; (follow links to similar papers)
38 pages, August 28, 2013
This is a revised version of a paper that circulated previously under the title“Inattentiveness:an alternative explanation of investment gulps”.
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- This paper is published as:
Verona, Fabio, (2014), 'Investment dynamics with information costs', Journal of Money, Credit and Banking, Vol. 46, December, pages 1627-1656
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