Adjustment Costs, Irreversibility and Investment Patterns in African Manufacturing

53 Pages Posted: 15 Feb 2006

See all articles by Stefan Dercon

Stefan Dercon

University of Oxford - Department of Economics

Marcel Fafchamps

Stanford University - Freeman Spogli Institute for International Studies

Bernard Gauthier

HEC Montreal

Date Written: July 1999

Abstract

This paper examines dynamic patterns of investment in Cameroon, Ghana, Kenya, Zambia and Zimbabwe, assessing the consistency of those patterns with different adjustment cost structures. Using survey data on manufactured firms, we document the importance of zero investment episodes and lumpy investment. The proportion of firms experiencing large investment spikes is significant in explaining aggregate manufacturing investment. Taken together, evidence from descriptive statistics, average investment regressions modeling the response to capital imbalance, and transition data analysis indicate that irreversibility is an important factor considered by firms when making investment plans. The picture is not unanimous however, and some explanations for the mixed results are proposed.

Keywords: African manufacturing investment adjustment costs duration dependence nonparametric methods unobserved heterogeneity

JEL Classification: E22 O12 016 C14

Suggested Citation

Dercon, Stefan and Fafchamps, Marcel and Gauthier, Bernard, Adjustment Costs, Irreversibility and Investment Patterns in African Manufacturing (July 1999). IMF Working Paper No. 99/99, Available at SSRN: https://ssrn.com/abstract=880626

Stefan Dercon

University of Oxford - Department of Economics ( email )

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Marcel Fafchamps

Stanford University - Freeman Spogli Institute for International Studies ( email )

Stanford, CA 94305
United States

Bernard Gauthier

HEC Montreal ( email )

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