This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. April 2014
  5. Investment Dispersion and the Business Cycle

Investment Dispersion and the Business Cycle

  • Rüdiger Bachmann
  • Christian Bayer
American Economic Review
vol. 104, no. 4, April 2014
(pp. 1392-1416)
Download Full Text PDF

Abstract

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.

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

Additional Materials

JEL Classification

  • D42 Market Structure and Pricing: Monopoly
  • D25 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