Extensive and Intensive Investment Over the Business Cycle

29 Pages Posted: 19 May 2009 Last revised: 19 May 2021

See all articles by Boyan Jovanovic

Boyan Jovanovic

New York University - Department of Economics

Peter L. Rousseau

Vanderbilt University - Department of Economics

Date Written: May 2009

Abstract

Investment of U.S. firms responds asymmetrically to Tobin's Q: investment of established firms -- 'intensive' investment -- reacts negatively to Q whereas investment of new firms -- 'extensive' investment -- responds positively and elastically to Q. This asymmetry, we argue, reflects a difference between established and new firms in the cost of adopting new technologies. A fall in the compatibility of new capital with old capital raises measured Q and reduces the incentive of established firms to invest. New firms do not face such compatibility costs and step up their investment in response to the rise in Q. The model fits the data well using aggregates since 1900.

Suggested Citation

Jovanovic, Boyan and Rousseau, Peter L., Extensive and Intensive Investment Over the Business Cycle (May 2009). NBER Working Paper No. w14960, Available at SSRN: https://ssrn.com/abstract=1405968

Boyan Jovanovic (Contact Author)

New York University - Department of Economics ( email )

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Peter L. Rousseau

Vanderbilt University - Department of Economics ( email )

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615-343-2466 (Phone)
615-343-8495 (Fax)

HOME PAGE: http://www.vanderbilt.edu/econ/faculty/rousseau.html

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