Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 18/2013:
Investment dynamics with information costs

Fabio Verona ()

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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