Investment Dynamics with Information Costs
This is a revised version of a paper that circulated previously under the title “Inattentiveness: An Alternative Explanation of Investment Gulps.” I am extremely grateful to Ricardo Reis for his invaluable guidance along the way. I thank two anonymous referees, Ryan Chahrour, Annalisa Ferrando, Manuel M. F. Martins, Isabelle Méjean, Emi Nakamura, Ctirad Slavík, Jón Steinsson, Luminita Stevens, Michael Woodford, and conference and seminar participants for comments and suggestions, and Glenn Harma for editorial assistance. This research was partially conducted while I was visiting Columbia University and the IMFS (Goethe University Frankfurt), whose hospitality I gratefully acknowledge. The Fundação para a Ciência e a Tecnologia, the IMFS, and the Cournot Centre provided financial support (Ph.D. scholarship, travel grant, and postdoctoral fellowship, respectively). The views expressed in this paper are those of the author, and do not necessarily reflect the views of the Bank of Finland. Any errors are my own.
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Abstract
Investment in physical capital at the microlevel is infrequent and large, or lumpy. The most common explanation for this is that firms face nonconvex physical adjustment costs. The model developed in this paper shows that information costs make investment lumpy at the microlevel, even in the absence of nonconvex adjustment costs. When collecting and processing information are 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.
