American Economic Review: Vol. 104 No. 4 (April 2014)


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Investment Dispersion and the Business Cycle

Article Citation

Bachmann, Rüdiger, and Christian Bayer. 2014. "Investment Dispersion and the Business Cycle." American Economic Review, 104(4): 1392-1416.

DOI: 10.1257/aer.104.4.1392


The cross-sectional dispersion of firm-level investment rates is procyclical. This makes investment rates different from productivity, output, and employment growth, which have countercyclical dispersions. A calibrated heterogeneous-firm business cycle model with nonconvex capital adjustment costs and countercyclical dispersion of firm-level productivity shocks replicates these facts and produces a correlation between investment dispersion and aggregate output of 0.53, close to 0.45 in the data. We find that small shocks to the dispersion of productivity, which in the model constitutes firm risk, suffice to generate the mildly procyclical investment dispersion in the data but do not produce serious business cycles.

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Online Appendix (343.46 KB) | Download Data Set (140.39 KB) | Author Disclosure Statement(s) (12.51 KB)


Bachmann, Rüdiger (RWTH Aachen U and CESifo, Munich)
Bayer, Christian (U Bonn)

JEL Classifications

D42: Market Structure and Pricing: Monopoly
D92: Intertemporal Firm Choice: Investment, Capacity, and Financing
E32: Business Fluctuations; Cycles
G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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