Capital adjustment costs and investment decisions: Estimation of a dynamic discrete choice model for Spanish manufacturing ...rms

In this paper we propose and estimate a dynamic structural model of ...xed capital investment at the ...rm level. Our dataset consists on an unbalanced panel of Spanish manufacturing ...rms. Two important features are present in this dataset. There are periods in which ...rms decide not to invest and periods of large investment episodes. These empirical evidence of infrequent and lumpy investment provides evidence in favour of irreversibilities and nonconvex capital adjustment costs. We consider a dynamic discrete choice model of irreversible investment with a general speci...cation of adjustment costs including convex and nonconvex components. We use a two stage estimation procedure. In a ...rst stage, we obtain GMM estimates of technological parameters. In the second stage, we obtain partial maximum likelihood estimates for the adjustment cost parameters. The estimation strategy builds on the representation of conditional value functions as a computable function of conditional choice probabilities. It is in the line of structural estimation techniques which avoid the solution of the dynamic programming problem. ¤I am very grateful to my thesis advisor Cesar Alonso. I would also like to thank Victor Aguirregabiria, Pedro Mira, Alfonso R. Sanchez and seminar participants at Universidad Carlos III de Madrid and Universitat Autonoma de Barcelona for helpful comments. Financial support from project BEC2000-0170 by the Spanish goverment is acknowledged. All remaining errors are my own.