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Price and Investment Dynamics: Theory and Plant-Level Data


  • The authors are grateful for helpful comments from Jonas Agell, Marcus Asplund, Mark Bils, Stephen Bond, Mikael Carlsson, Robert Chirinko, Matz Dahlberg, Tore Ellingsen, Richard Friberg, Anders Forslund, Simon Gilchrist, Vivek Ghosal, Aidan Hollis, Joakim Jansson, Hanna Ågren, and the referees. We also benefited from comments at the Riksbank, Stockholm School of Economics, Stockholm University, Uppsala University, the CESifo Area conference in IO, the 2nd Annual International IO Conference in Chicago, the 11th International Conference on Panel Data at Texas A&M University, the ESWC 2005, and the JMCB/FRB Conference Quantitative Evidence on Price Determination. This research was supported by the Browaldh–Wallander–Hedelius foundation.


We construct a model of a firm competing for market share in a customer market and making investments in physical capital. The firm is financially constrained and there are implementation lags in investment. Our model predicts that product prices should depend on costs and competitors' prices but respond weakly to demand shocks. Also, prices should be strongly related to investment. We estimate price and investment equations on panel data for Swedish manufacturing plants and find results that are qualitatively in line with these predictions, though the relation between investment and prices is stronger than predicted by our model.

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