Econometric Studies of Investment Behavior: A Survey
Author(s): Dale W. Jorgenson Source: Journal of Economic Literature, Vol. 9, No. 4 (Dec., 1971), pp. 1111-1147 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2721137 . Accessed: 22/09/2014 23:37 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. . American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to Journal of Economic Literature. http://www.jstor.org This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Econometric S tu d ies of Inves tment Behavior: A S u rvey By DA LE W. JORGENS ON Harvard Univers ity I wvis h to expres s my gratitu d e to Charles W. Bis chof f , Zvi Griliches , and Bert G. Hickman f or very d etailed and helpf u l comments on this paper. They are not, of cou rs e, res pons ible f or any remaining errors or d ef i- ciencies . 1. Introd u ction IN THIS PA PER the read er will f ind a review of econometric s tu d ies of inves tment in f ixed capital. A review of thes e s tu d ies throu gh 1953 was given in 1957 by J. Mey er and E. Ku h [86], and a d etailed review throu gh 1960 was pres ented by R. Eis ner and R. H. S trotz in 1963 [36]. In this review we concentrate on recent res earch on time s eries of inves tment expend itu res f or ind i- vid u al f irms and ind u s tries . Ou r point of d epartu re is the f lexible accelerator mod el of inves tment originated by H. B. Chenery [13, 1952] and L. M. Koy ck [74, 1954]. In this mod el attention is f ocu s ed on the time s tru ctu re of the inves tment proces s . The d e- s ired level of capital is d etermined by long- ru n cons id erations . Changes in d es ired capi- tal are trans f ormed into actu al inves tment expend itu res by a geometric d is tribu ted lag f u inction-the s pecif ication of d es ired capital has been the s u bject of a wid e variety of alternative theories ; the alternative theories d o agree on the valid ity of the f lexible ac- celerator mechanis m. Denoting the actu al level of capital by K and the d es ired level by K+, capital is ad - ju s ted toward its d es ired level by a cons tant proportion of the d if f erence between d es ired and actu al capital, (1) Kt -Kt = [1 - X][K+t- Kt- . A lternatively , actu al capital may be repre- s ented as a weighted average of all pas t levels of d es ired capital, 00 (2) Kt = [1 -X] E XTK+tT, Tr=O with geometrically d eclining weights . We ref er to the latter f orm of the f lexible ac- celerator as a d is tribu ted lag f u nction relat- ing the actu al level of capital to pas t d es ired levels of capital. The f lexible accelerator mod el was originally propou nd ed as an alternative to the accelerator mod el of J. M. Clark [14, 1917]. In the accelerator mod el, the ad ju s tment coef f icient 1-X is taken to be u nity , s o that actu al capital is equ al to d es ired capital, and net inves tment is pro- portional to the change in d es ired capital, Kt -Kt-, = K+t - K+t-,. In Clark's accelerator mod el d es ired capital is proportional to ou tpu t. The accelerator mod el with ad ju s tment coef f icient 1-X equ al to u nity was rejected in tes ts by S . Ku znets , J. Tinbergen, H. B. Chenery , L. M. Koy ck, and B. Hickman [78, Ku znets , 1935; 103, Tinbergen, 1938; 13, Chenery , 1952; 74, Koy ck, 1954 and 56, Hickman, 1957]. A s econd alternative to Clark's accelera- tor mod el is that inves tment d epend s on the level of prof its ; this theory of inves tment was f irs t propos ed by Tinbergen [103, 1938 and 104, 1939] and s u bs equ ently d eveloped by Klein [70, 1950 and 71, 1951]. Two alterna- tive rationalizations of this theory have been of f ered . Firs t, Tinbergen argu es [104] that realized prof its meas u re expected pro- f its : "It is almos t a tau tology to s ay that inves tment is governed by prof its expecta- lll This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1112 Jou rnal of Economic Literatu re tions ." S econd ly , the rate of inves tment may be cons trained by the s u pply of f u nd s . In the s trong vers ion of this theory the f inancial cons traint operates at all times (the cos t of f u nd s s ched u le becomes highly inelas tic where internal f u nd s are exhau s ted ). In a weaker vers ion of the theory the f inancial cons traint operates at low rates of capacity u tilization, while extreme pres s u re on capac- itv may res u lt in the u s e of ou ts id e s ou rces of f inance [86, Mey er and Ku h, 1957, pp. 190- 208; 3, A nd ers on, 1964; 85, Mey er and Glau ber, 1964; 76, Ku h, 1963 and 22, Du es enberry , 1958]. Within the f ramework provid ed by the f lexible accelerator mod el all three d eterminants of inves tment-ou tpu t, internal f u nd s , and the cos t of external f inance-may be inclu d ed as d eterminants of the d es ired level of capital. The f lexible accelerator mechanis m may be trans f ormed into a complete theory of in- ves tment behavior by ad d ing a s pecif ication of the d es ired level of capital and a mod el of replacement inves tment. By accou nting d ef inition, the change in capital f rom period to period is equ al to gros s inves tment les s replacement inves tment. The f lexible ac- celerator provid es an explanation of change in capital, bu t not of gros s inves tment. The choice of a mod el of replacement is impor- tant s ince replacement inves tment pre- d ominates in total inves tment expend itu res , at leas t at the aggregate level [77, Ku znets , 1961 ].1 The geometric mortality d is tribu tion has been wid ely ad opted f or empirical work; f or this d is tribu tion replacement is propor- tional to actu al capital s tock [57, Hickman, 1965; 59, Jorgens on, 1963 and 60, Jorgens on, 1965 ]. Und er this as s u mption the change in capital s tock may be written: (3) Kt- Kt- = A t- bKt-ly where A is gros s inves tment and 5 is the rate of replacement, a f ixed cons tant. Combining the geometric mod el of replacement with the f lexible accelerator mod el of net inves tment, we obtain a mod el of inves tment expend i- tu res : (4) A t = [l- X][K+t -Kt-1] + WKt-1. In this mod el the ad ju s tment coef f icient f or replacement inves tment is equ al to u nity . The s peed of ad ju s tment f or gros s inves t- ment is mu ch more rapid than the s peed of ad ju s tment f or net inves tment. A lternative econometric mod els of in- ves tment behavior d if f er in the d eterminants of the d es ired level of capital, in character- ization of the time s tru ctu re of the inves t- ment proces s , and in treatment of replace- ment inves tment. In the f lexible accelerator mod el of Chenery and Koy ck, d es ired capital is proportional to ou tpu t, cls in the rigid ac- celerator of Clark. In alternative mod els of inves tment behavior, d es ired capital d epend s on capacity u tilization, internal f u nd s , the cos t of external f inance, and other variables . In reviewing alternative mod els of inves t- ment behavior ou r f irs t objective is to d e- s cribe and evalu ate the s election of the d eterminants of the d es ired level of capital in each of the s tu d ies u nd er review. In the f lexible accelerator mod el of Chenery and Koy ck, the time s tru ctu re of the inves t- ment proces s is characterized by a geometric d is tribu ted lag f u nction. A ctu al capital is a d is tribu ted lag f u nction of d es ired capital with geometrically d eclining weights . This characterization has been mod if ied by Chen- ery s o that d es ired capital is proportional to lagged ou tpu t; the bes t f itting lag may be d etermined by comparing d if f erent lags with regard to good nes s of f it. Koy ck has mod i- f ied the geometric d is tribu ted lag f u nction s o that the f irs t weight may be d etermined as a s eparate parameter with s u cces s ive weights d eclining geometrically , Kt = aK+t + [1 -a] [l - XI E XrK+ti. T=0 The geometric d is tribu ted lag f u nction may be extend ed by allowing ad d itional weights 1 Capital cons u mption has d ominated gros s capital f ormation f or the economy as a whole s ince 1919. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1113 to be d etermined as s eparate parameters or by making d es ired capital a f u nction of the lagged valu es of its d eterminants . In review- ing mod els of inves tment behavior ou r s ec- ond objective is to d es cribe and evalu ate alternative repres entations of the time s tru c- tu re of the u nd erly ing inves tment proces s . Finally , -mod els of inves tment behavior d if f er in their treatment of replacement in- ves tment. If replacement is proportional to capital s tock, the u nd erly ing mortality d is - tribu tion f or inves tment good s is geometric. Change in capital s tock is equ al to gros s in- ves tment les s a cons tant proportion of capital s tock, s o that capital s tock is a weighted s u m of pas t gros s inves tments with geometrically d eclining weights , 00 Kt = , (1 -6)A t_,T r=-O A n internally cons is tent mod el of replace- ment inves tment bas ed on proportionality between replacement inves tment and capital s tock requ ires a meas u re of capital s tock bas ed on the geometric mortality d is tri- bu tion. Fu rthermore, d u ality between ac- qu is ition of inves tment good s and the time rental valu e of capital requ ires the incor- poration of d epreciation into the cos t of capital. Ou r f inal objective in reviewing alternative mod els of inves tment behavior is to d es cribe and evalu ate the treatment of replacement inves tment. 2: Inves tment by Ind ivid u al Firm8 2.1. Introd u ction The f irs t part of this review is d evoted to s tu d ies of inves tment behavior by ind i- vid u al U.S . manu f actu ring f irms . We f ocu s attention on s tu d ies of time s eries on in- ves tment expend itu res ; time s eries analy s is requ ires a d etailed repres entation of the time s tru ctu re of the inves tment proces s . Thes e res u lts can be compared d irectly with res u lts f rom s tu d ies of ind u s try grou ps . Time s eries s tu d ies of inves tment by ind ivid u al f irms have been completed by Eis ner [30, 1967], Y. Gru nf eld [49, 1960], Jorgens on and C. D. S iebert [65, 1968 and 64, 1968], and Ku h [76, 1963]. Cros s s ection s tu d ies have been carried ou t by P. J. Dhry mes and M. Ku rz [20, 1967], J. J. Diamond [21, 196J2], Eis ner [26, 1960; 29, 1962; 27, 1963; 25, 1964 and 30, 1967], Ku b [76, 1963], Mey er and Glau ber [85, 1964, Chapters 2, 3, 5 and 6], and Mu eller [97, 1967]. 2.2. Ku h's capital s tock growth Ku h's s tu d y of time s eries on inves tment by ind ivid u al f irms compares two mod els of inves tment behavior. The f irs t is clos ely re- lated to the f lexible accelerator mod el of Chenery and Koy ck with d es ired capital proportional to s ales . The s econd is analo- gou s to the f lexible accelerator with d es ired capital proportional to prof its . A third mod el with d es ired capital a f u nction of both s ales and prof its is inclu d ed in the comparis ons . Ku h's principal conclu s ions [76, 1963, p. 213] are bas ed on comparis ons of the alter- native mod els : "S ince the major objective is to improve u nd ers tand ing of d y namic time s eries behavior, it s hou ld be pointed ou t that no matter how the contras ts are d rawn f rom time s eries , the acceleration s ales mod el is s u perior to the internal f u nd f low, prof it mod el." In f ormu lating the prof its mod el Ku h points ou t [76, p. 208] that " . . . the expec- tational hvpothes is f or prof its cannot, and perhaps s hou ld not, be d is tingu is hed f rom the s ales level or capacity accelerator hy poth- es is . The main cand id ate variable f or the expectational hy pothes is is s imply net in- come af ter tax, a s econd ary cand id ate being gros s operating prof it. Both variables will have s trong correlations with the level of s ales ." The alternative rationale f or the prof its theory of inves tment is that the rate of inves tment is cons trained by the s u pply of f u nd s . The bas ic premis e of this vers ion of the prof its theory is that the s u pply of f u nd s s ched u le ris es s harply at the point where internal f u nd s are exhau s ted . Ku h employ s This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1114 Jou rnal of Economic Literatu re retained earnings plu s d epreciation as a mea- s u re of prof its ; his res u lts s u gges t that s ales rather than internal f u nd s d etermine the level of d es ired capital. Ku h's vers ion of the f lexible accelerator treats d es ired capital as proportional to s ales (or prof its ), lagged s ales , or an average of s ales and lagged s ales . The weights as s oci- ated with d es ired capital d ecline geometri- cally [76, pp. 7-16]. Within Ku h's s tu id y , es timates f rom time s eries and cros s s ections conf lict. Es timates f rom a f irs t d if f erence mod el are d is s imilar f rom the corres pond ing res u lts f or other treatments of the time s tru c- tu re.2 Thes e res u lts s u gges t that the geo- metric d is tribu ted lag f u nction employ ed by Ku h res u lts in a mis -s pecif ication of the time s tru ctu re of the inves tment proces s . In Ku h's mod el f or gros s inves tment re- placement inves tment is proportional to capital s tock [76, p. 9296]. The implied mor- tality d is tribu tion f or inves tment good s , inclu d ing retirements and the d ecline in ef f iciency of exis ting capital good s , is geo- metric. Ku h meas u res capital s tock as cu mu lated gros s inves tment les s retirements , each d ef lated by an appropriate inves tment good s price ind ex [76, pp. 64-74]. Decline in ef f iciency of exis ting capital good s is ignored in meas u ring capital s tock, which is incon- s is tent with Ku h's treatment of replacement inves tment. 2.3. Gru nf eld 's s tu d y of corporate inves tment A n alternative attack on the u s e of prof its as a d eterminant of d es ired capital has been mad e by Y. Gru nf eld . He incorporates lagged prof its into a f lexible accelerator mod el and f ind s [49, Gru nf eld , 1960, p. 219] that the partial correlation of prof its and inves tment, given capital s tock, is ins ignif icant: "Ou r re- s u lts d o not conf irm the hy pothes is that prof its are a good meas u re of thos e expected prof its that will tend to ind u ce inves tment expend itu res . The obs erved s imple correla- tion between inves tment and prof its s eems to be d u e to the f act that prof its are ju s t another meas u re of the capital s tock of the f irm...." S imilar res u lts are obtained f or the s tock of liqu id as s ets and the cu rrent level of prof its . Gru nf eld s u gges ts that d is cou nted f u tu re earnings les s the cos ts of f u tu re ad d itions to capital provid e a better meas u re of expected prof its than cu rrent realized prof its . In Gru nf eld 's theory d es ired capital is propor- tional to the valu e of the f irm's ou ts tand ing s ecu rities . Gru nf eld ju s tif ies this theory on the grou nd s that s tock market participants have as mu ch inf ormation abou t f u tu re earn- ings as the managers of f irms . In ad d ition, participants in the s tock market have s trong economic incentives to make accu rate f ore- cas ts of f u tu re earnings . The partial correla- tion of the valu e of the f irm and inves tment, given capital s tock, is s ignif icant [49, p. 233 ]. Mu ltiply ing the valu e of the f irm by the corporate bond rate to meas u re expected prof its , Gru nf eld f ind s that "The over-all power of the valu e of the f irm to explain in- ves tment s eems to be nearly id entical to the combined powers of the expectations vari- able and the rate of interes t" [49, p. 241]. The repres entation of the time s tru ctu re of the inves tment proces s employ ed by Gru nf eld is id entical to that of Ku h.3 Gru n- f eld , like Ku h, as s u mes that replacement in- ves tment is proportional to capital s tock or that the mortality d is tribu tion f or inves t- ment good s is geometric. He meas u res capital as cu mu lated gros s inves tment les s d eprecia- tion, each d ef lated by an appropriate inves t- ment good s price ind ex. The initial level of capital is s et equ al to zero in 1935. A ccou nt- ing d epreciation throu ghou t the period of Gru nf eld 's s tu d y , 1935-1954, is bas ed on the s traight-line method , which is incons is tent with a geometric mortality d is tribu tion f or inves tment good s [49, pp. 217-18]. Nonethe- les s , Gru nf eld 's meas u rement of capital s tock is an improvement over Ku h's s ince d ef lated accou nting d epreciation provid es a 2 S ee below, s ection 4.3. 3 S ee above, s ection 2.2. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1115 better approximation to replacement re- qu irements than d ef lated retirements . 2.4. Eis ner's permanent income theory f or inves tment The f irs t permanent income mod el of in- ves tment cons id ered by Eis ner employ s the ratio of inves tment to gros s f ixed as s ets as an ind epend ent variable and the rate of growth of s ales , the ratio of prof its to gros s f ixed as s ets , and the ratio of d epreciation to gros s f ixed as s ets f or a s ingle y ear as ind e- pend ent variables . The d epreciation variable is cons tant acros s time s eries obs ervations f or a given f irm and may be regard ed as the cons tant term in the time s eries regres s ion f or each f irm. Unlike Gru nf eld and Ku b, Eis ner impos es the as s u mption that param- eters other than the cons tant term in the regres s ion are the s ame f or all f irms . Prof its and the rate of growth of s ales are both s ig- nif icant d eterminants of d es ired capital in the f irm time s eries regres s ions f or the period 1955-62 [30, 1967, p. 374]. The proportion of the f irm time s eries variance explained by Eis ner's mod el f or this period is .055. Eis ner cons id ers an alternative mod el of inves tment f or ind ivid u al f irms f or the pe- riod 1960-62. This alternative mod el inclu d es two ad d itional ind epend ent variables repre- s enting the market valu e of the f irm intro- d u ced by Gru nf eld and the rate of retu rn. To be more precis e, the ad d itional ind epend ent variables are the ratio of the market valu e of the f irm to net worth plu s d epreciation re- s erve plu s bond ed ind ebted nes s , and the ratio of prof its af ter taxes plu s d epreciation plu s interes t to the market valu e of the f irm. The res u lts f or f irm time-s eries change d ra- matically with the ad d ition of thes e two vari- ables . Only prof its and the rate of retu rn ap- pear as s ignif icant d eterminants of d es ired capital. Des ired capital is pos itively related to prof its and negatively related to the rate of retu rn [30, p. 378]. Eis ner's res u lts f or the period 1960-62 d irectly contrad ict his res u lts f or the period 1955-62, bas ed on a les s complete mod el, incorporating all of the s ame variables (ex- cept f or market valu e of the f irm and the rate of retu rn). The res u lts f or the period 1960-62 als o contrad ict the mod el u nd erly - ing Eis ner's extens ive earlier analy s is of inves tment by ind ivid u al f irms . The earlier analy s is is bas ed on mod els incorporating change in s ales as the principal d eterminant of inves tment behavior [20, 1967; 21, 1962; 26, 1960; 29, 1962; 27, 1963; 25, 1964 and 30, 1967]. Upon empirical tes ting, Eis ner's mod el f or the period 1960-62 ef f ectively re- d u ces to the mod el propos ed by Gru nf eld . The prof its variables repres ent prof it ex- pectations ; the rate of retu rn repres ents the cos t of external f inance. In Gru nf eld 's mod el prof it expectations are repres ented by the prod u ct of the valu e of the f irm and the corporate bond rate; the cos t of external f inance is repres ented by the corporate bond rate. The prod u ct of Eis ner's rate of retu rn and the valu e of the f irm is prof its af ter taxes plu s d epreciation plu s interes t. Prof its af ter taxes are a s ignif icant explanatory vari- able in Eis ner's mod el. Eis ner's d is tribu ted lag f u nction cons is ts of a f inite weighted average of pas t rates of growth of s ales , prof its , rates of retu rn, and market valu es of the f irm. A lthou gh s even lagged terms in the rate of growth of s ales are inclu d ed in the regres s ions , only two lagged terms in each of the other variables are inclu d ed . In ef f ect, inves tment is a weighted average of cu rrent and lagged valu es of prof its and the rate of retu rn [30, 1967, p. 378]. Replacement inves tment is treated as proportional to gros s capital s tock; no attempt is mad e to correct book valu es of gros s capital s tock f or variations in the ac- qu is ition cos t of inves tment good s [30, pp. 370-71]. The u s e of gros s capital s tock is incons is tent with the geometric mortality d is tribu tion f or inves tment good s as s u med by Eis ner. This review of Eis ner's permanent income mod el of inves tment is limited to f irm time s eries res u lts . Only thes e res u lts are com- parable to thos e f or the other s tu d ies of This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1116 Jou rnal of Economic Literatu re f irm behavior inclu d ed in this review. Eis ner pres ents regres s ions f or cros s s ections of f irms and f or ind u s try time s eries and cros s s ections . His own analy s is of the res u lts at- tempts to relate d if f erences in es timates of the f actors af f ecting inves tment "to d if f ering permanent and trans itory components in the relevant variances and covariances [30, 1967, p. 386 1." A d etailed s u mmary of this analy s is is pres ented by Eis ner in his 1967 work [30, pp. 386-87]. 2.5. Jorgens on and S iebert;'s theory of optimal capital accu mu lation Jorgens on and S iebert cons id ered two mod els of corporate inves tment behavior bas ed on an optimal time path f or capital accu mu lation. Optimal accu mu lation implies a theory of the rate of retu rn; this theory has been d eveloped by Mod igliani and Miller [89, 1958; 94, 1959; 91, 1961; 92, 1963; 88, 1963; 90, 1965; 95, 1966; 96, 1967 and 93, 19691. In the Mod igliani-Miller theory the cos t of capital is s hown to be ind epend ent of the f inancial s tru ctu re of the f irm or of d ivid end policy ; this view contras ts s harply with the theory of the cos t of capital u nd er- ly ing the liqu id ity theory of inves tment be- havior. In the liqu id ity theory the s u pply s ched u le is horizontal u p to the point at which internal f u nd s are exhau s ted and ver- tical at that point. In the Mod igliani-Miller theory the ap- propriate cos t of capital f or inves tment d e- cis ions is a weighted average of the expected retu rn to equ ity and the retu rn to d ebt. The retu rn to equ ity is meas u red in two alterna- tive way s : f irs t, capital gains on as s ets held by the f irm may be regard ed as trans itory , s o that retu rn to equ ity is meas u red exclu d - ing capital gains . S econd , capital gains on as s ets may be regard ed as part of the retu rn to inves tment s o that retu rn to equ ity in- clu d es capital gains . The f irs t mod el s tu d ied by Jorgens on and S iebert, ref erred to as Neoclas s ical I, inclu d es capital gains . The s econd mod el, ref erred to as Neoclas s ical II, exclu d es capital gains [65, 1968, p. 1130]. In both mod els cons id ered by Jorgens on and S iebert, d es ired capital is proportional to the ratio of the valu e of ou tpu t to the price of capital s ervices . The price of capital s ervices d epend s on the price of inves tment good s , the rate of retu rn, the rate of d epre- ciation, the rate of growth of the price of inves tment good s , and the tax s tru ctu re. The objective of the f irm is to maximize its mar- ket valu e; maximization of market valu e is implied by maximization of prof it at every point of time, where prof it is d ef ined as net revenu e on cu rrent accou nt les s the rental valu e of capital s ervices . The vers ion of the f lexible accelerator em- ploy ed by Jorgens on and S iebert treats net inves tment as a d is tribu ted lag f u nction of changes in d es ired capital. The weights as s ociated with changes in d es ired capital are approximated by the weights in a ra- tional d is tribu ted lag f u nction [65, 1968, p. 11281. This clas s of d is tribu ted lag f u nctions inclu d es the geometric d is tribu ted lag f u nc- tion and generalizations of it propos ed by Koy ck as s pecial cas es . Jorgens on and S iebert choos e the bes t-f itting rational d is - tribu ted lag f u nction f or each mod el of in- ves tment they cons id er. In the Jorgens on-S iebert mod els f or gros s inves tment, replacement is proportional to capital s tock, s o the implied mortality d is - tribu tion f or capital good s is geometric. Capital s tock is meas u red by a perpetu al inventory method with d eclining balance re- placement. Gros s inves tment in cons tant prices is interpolated between initial and terminal es timates of net capital s tock f rom balance s heet d ata [65, 1968, p. 1129]. For the geometric mortality d is tribu tion, the rate of replacement is equ al to the rate of d e- preciation; this -common rate is -employ ed in es timating capital s tock and in meas u ring the price of capital s ervices . Jorgens on and S iebert f ind that a mod el of optimal capital accu mu lation, incorporat- This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1117 ing capital gains on as s ets held by the f irm, perf orms bes t [65, pp. 1142-43 and 64, 1968]. They have als o compared the per- f ormance of mod els bas ed on optimal capital accu mu lation with corres pond ing mod els bas ed on the acceleration principle-like thos e employ ed by Ku h and Eis ner, internal liqu id ity , like thos e employ ed by Gru nf eld and Ku h, and expected prof its , employ ed by Gru nf eld and Eis ner. The overall ranking f or pos twar d ata is : 1. Neoclas s ical I. 2. Neoclas s ical II. 3. Expected Prof its . 4. A ccelerator. 5. Liqu id ity . This ranking corres pond s with that of Ku h f or the A ccelerator and Liqu id ity mod els , with Gru nf eld f or Expected Prof its and Liqu id ity mod els , and with Eis ner f or Ex- pected Prof its and A ccelerator mod els . 3. Inves tment by Ind u s try Grou ps 3.1. Introd u ction The s econd part of ou r review is d evoted to s tu d ies of inves tment behavior by ind u s - try grou ps within A merican manu f actu ring. In reviewing thes e s tu d ies we concentrate on econometric mod els of inves tment behavior f or two-d igit ind u s tries within U.S . manu - f actu ring. Res u lts cons is tent acros s ind u s - tries are d if f icu lt to achieve by cons id eration of a wid e range of alternative s pecif ications and s election of the bes t f itting among them. S tu d ies of qu arterly d ata on inves tment by ind u s try grou ps f rom the OBE-S EC S u rvey have been mad e by A nd ers on [3, 1964], Eis ner [29, 1962 and 31, 1965], Evans [37, 1967], Jorgens on and S tephens on [67, 1967; 68, 1967 and 66, 1969], Mey er and Glau ber [85, 1964, Chapters 4 and 7], and Res ek [98, 1966]. S tu d ies of annu al d ata have been mad e by Bou rneu f [10, 1964] and Hickman [57, 1965]. S tu d ies of annu al or qu arterly d ata f or aggregates s u ch as total manu - f actu ring have been mad e by A nd ers on [2, 1967, pp. 413-25], Bis chof f [9, 1969; 8, 1970 and 41, 1971, pp. 61-130], Coen [16, 1968; 17, 1969 and 15, 1971], d e Leeu w [79, 1962], Ecks tein [24, 1965], Eis ner [32, 1969; 28, 1969 and 33, 1970], Eis ner and Nad iri [34, 1968 and 35, 1968], Greenberg [42, 1964], Griliches and Wallace [48, 1965], Hall and Jorgens on [51, 1967; 52, 1969 and 53, 1971], Hammer [54, 1964], Jorgens on [59, 1963 and 60, 1965], Klein and Tau bman [73, 1971], Lintner [80, 1967], S chramm [100, 1970], and Thu row [102, 1969]. S tu d ies of cros s s ections of ind u s tries have been mad e by G. J. S tigler [101, 1963]. In as s es s ing the d eterminants of the d es ired level of capital in s tu d ies of inves t- ment by ind ivid u al ind u s try grou ps , we d i- vid e the s tu d ies into two categories . In the f irs t grou p of s tu d ies , A nd ers on, Bou rneu f , Evans , Mey er and Glau ber and Res ek, each d eterminant enters the regres s ion f u nction d etermining inves tment expend itu res as a s ingle variable. To apprais e the res u lts we can tes t each of the propos ed d eterminants f or s ignif icance. Where s everal d eterminants enter the regres s ion f u nction, this apprais al requ ires s imu ltaneou s hy pothes is tes ting. A n appropriate techniqu e f or this pu rpos e is S chef f e's S -method . In this method critical regions f or each of the hy pothes es are s et s imu ltaneou s ly s o as to control the overall level of s ignif icance at a pred etermined level. This method is d is cu s s ed in d etail by S chef f e [99, 1959] and compared with the alternative and incorrect method of apply ing ord inary critical regions f or each ind ivid u al hy pothes is when s everal hy pothes es are tes ted s imu ltaneou s ly . In the s econd grou p of s tu d ies -thos e of Eis ner, Hickman, and Jorgens on and S tephens on-s ome d etermi- nants of inves tment expend itu res enter the regres s ion f u nction as a nu mber of s eparate variables , repres enting d if f erent lagged val- u es of the s ame variable. S chef f e's S -method can not be u s ed to apprais e the overall s ignif icance of all of the lagged valu es of each variable. For this pu rpos e a d irect This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1118 Jou rnal of Economic Literatu re comparis on of the perf ormance of alternative mod els is u s ef u l. 3.2. A nd ers on's corporate f inance and f ixed inves tment We f irs t cons id er W. H. L. A nd ers on's mod el of inves tment behavior. The rationale f or A nd ers on's mod el has been d eveloped by Du es enberry . Du es enberry 's theory of in- ves tment is characterized by A nd ers on as ... a res tatement of the neoclas s ical pos ition that inves tment is d etermined by the inters ection of the marginal ef f iciency s ched u le with the marginal cos t of f u nd s s ched u le. The marginal ef f iciency s ched u le, Du es enberry argu es , s hif ts abou t primarily in res pons e to changes in the rate of u tilization of exis ting capacity . The marginal cos t of f u nd s s ched u le s hif ts abou t in res pons e to changes in the d egree of f inancial ris k as well as to changes in the market cos t of f u nd s [3, 1964, p. ;7]. The d eterminants of d es ired capital in A nd ers on's mod el inclu d e three relatively s tand ard elements -pres s u re on capacity , prof its , and interes t rates -and three novel ones -s tocks of government s ecu rities held at the beginning of the period , accru ed tax liability at the end of the period , and long- term d ebt capacity [3, pp. 70-71]. Pres s u re on capacity is meas u red by the d if f erence be- tween actu al s ales and previou s maximu m s ales , taken as a meas u re of prod u ctive capacity . Long-term d ebt capacity is d ef ined as the d if f erence between 18 percent of total as s ets and ou ts tand ing long-term d ebt at the beginning of the period . Debt capacity repre- s ents the availability of u nu s ed borrowing ability , whereas government s ecu rities and tax liability repres ent available liqu id ity and the need f or liqu id as s ets . A nd ers on omits replacement inves tment f rom his mod el al- together. A nd ers on d ivid es the time s tru ctu re of the inves tment proces s into three components . One part is a lag between changes in the d eterminants of inves tment behavior and changes in the expectations abou t thes e vari- ables . A lternatively , expectations may be d etermined by a trend plu s s ome cons tant proportion of the d eviation of the actu al variable f rom trend [3, pp. 62-63]. This is the expectations mechanis m u s ed in the analy s is of inves tment by two-d igit ind u s try grou ps . The s econd part of the time s tru ctu re is a lag f rom a change in the expected valu es of d eterminants of d es ired capital to the actu al d ecis ion to inves t. A nd ers on id enti- f ies the f inal d ecis ion with the appropriation of f u nd s [3, pp. 65-69 ] and treats the d e- cis ion lag as a f ixed parameter to be es ti- mated f rom the d ata. Finally , there is a lag f rom the inves tment d ecis ion to actu al ex- pend itu res , that is , f rom appropriations to actu al inves tment. A nd ers on d etermines the lag f rom appro- priations to expend itu res empirically f rom d ata on appropriations and inves tment. The f itted lag d is tribu tion as s igns equ al weights to appropriations lagged one throu gh f ou r period s , s o that the average lag is two and a half qu arters [3, p. 68]. A s a cons equ ence of this empirical f ind ing, A nd ers on repres ents the u nd erly ing d eterminants of inves tment as moving f ou r-qu arter averages of qu arterly d ata. For two-d igit ind u s tries , "In all cas es bu t three, the bes t d ecis ion lag s eemed to be three qu arters , the lag which [als o] y ield ed the bes t res u lts f or aggregate manu f actu ring" [3, p. 113]. For the total inves tment proces s , a three-qu arter d ecis ion lag implies a lag of f ive and a half qu arters plu s the lag f rom actu al to expected valu es of the d eterminants of d es ired capital. For a more f ormal vers ion of A nd ers on's mod el, inclu d ing his s pecif ication of the d eterminants of inves tment and of the time s tru ctu re of the inves tment proces s , let in- ves tment in cu rrent prices be qA tA t where qA t is the price of inves tment good s and A t the qu antity of inves tment expend itu res ; the mod el takes the f orm: qA tA t = 30 + Olt + /2(S - S inax)t-3 + f 3REDt-3 + f 4G#t3 (5) + f l5Tat-3 + 06KDL,t-3 This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1119 + 37 t-3 + l8Q1 + 39Q2 + loQ3 + Ct. In this mod el a bar over a variable (-) ind i- cates a moving average f or f ou r qu arters beginning with the qu arter ind icated (e.g., t-3) and extend ing backward . The variable t is a time trend , S - S max corres pond s to pres s u re on capacity , where S is s ales and S max is its previou s maximu m valu e, RED is gros s retained prof its , the s u m of retained earnings and d epreciation expens e, and i' is the Treas u ry bill y ield . The time trend is introd u ced to accou nt f or d if f erence between actu al and expected valu es of the d etermi- nants of inves tment expend itu res . The other three variables repres ent the ef f ects of capac- ity u tilization, prof it, and the interes t rate. The variable G is the s tock of government s ecu rities held at the beginning of the period , Ta is accru ed tax liability at the end of the period , and KDL is long-term d ebt capacity . Thes e variables repres ent the ef f ects of the need f or liqu id ity and the ris kines s of bor- rowing. The variables Ql, Q2, and Q3 are s eas onal d u mmy variables equ al to one in the corres pond ing qu arter and zero other- wis e. To apprais e A nd ers on's empirical f ind ings [3, 1964, pp. 108-16] we can tes t each of the propos ed d eterminants of inves tment expen- d itu res f or s ignif icance by means of S chef f e's S -method . The res u lts are given in Table 1. Thes e res u lts s u gges t that the explanatory variables may be d ivid ed into three grou ps . Capacity u tilization S -S max and the interes t rate i' are clearly s ignif icant d eterminants of inves tment. The capacity u tilization variable is s ignif icantly d if f erent f rom zero in 5 of 13 ind u s tries ; this variable has an incorrect s ign f or only one ind u s try grou p. The in- teres t rate is s ignif icantly d if f erent f rom zero in 6 of 13 ind u s tries ; this variable has the wrong s ign f or three ind u s try grou ps . The s econd s et of explanatory variables -d ebt capacity KDL, government s ecu rities G, and tax liability Ta-inclu d es variables that are TA BLE 1 S IGNIFICA NCE OF DETERMINA NTS OF INVES TMENT EXPENDITURES , A NDERS ON MODEL, THIRTEEN INDUS TRY GROUPS , 19491-19581V (F.05;6,29= 92.43, S = 8.8) S ignif icant Ins ignif icant Deter- Coef f ictents Coef f icients minant Right Wrong Right Wrong S ign S ign S ign S ign S -S max 5 7 1 RED 1 7 5 G 8 6 4 Ta 2 9 2 KDL 8 1 7 2 it 6 4 3 S ou rce: A nd ers on [8, 1964, pp. 108-16]. barely s ignif icant as d eterminants of in- ves tment. Debt capacity is s ignif icant f or f ou r ind u s try grou ps , bu t has the wrong s ign f or one of thes e grou ps . Government s ecu r- ities is s ignif icant f or three ind u s try grou ps , not s ignif icant with the right s ign f or s ix, and not s ignif icant with the wrong s ign f or f ou r. Tax liability is s ignif icant f or only two in- d u s try grou ps . None of thes e res u lts is ou t of line with the nu ll hy pothes is that the cor- res pond ing coef f icients are equ al to zero. Internal f u nd s RED is clearly ins ignif icant as a d eterminant of inves tment d ecis ions ; it has the wrong s ign f or 6 of the 13 ind u s try grou ps and is s ignif icantly d if f erent f rom zero f or one of thes e grou ps . 3.3. Mey er and Glau ber's accelerator-res id u al f u nd s mod el The d eterminants of inves tment expend i- tu res in the mod el employ ed by Mey er and Glau ber f or analy zing d ata on inves tment by ind u s try grou ps inclu d e capacity u tilization, prof its , interes t rates , and the percentage change in the price of common s tocks [85, 1964, pp. 139-54]. Pres s u re on capacity is meas u red by the ratio of the Fed eral Res erve This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jou rnal of Economic Literatu re Board (FRB) ind ex of ind u s trial prod u ction to the McGraw-Hill capacity s eries , inter- polated f rom annu al benchmarks u s ing the OBE-S EC s eries on inves tment in the manu - f actu ring s ector. The prof its variable is es s en- tially the s ame as that employ ed by A nd er- s on, prof its af ter taxes minu s d ivid end s plu s d epreciation expens e. The interes t rate is Mood y 's A A A ind u s trial bond rate rather than the Treas u ry bill rate employ ed by A nd ers on [85, p. 46]. The theoretical bas is of the mod el is s imilar to that propos ed by A nd ers on and Du es enberry . The cos t of f u nd s s ched u le is as s u med to d epend on the availability of internal f u nd s , as well as on the cos t of external f inance as ref lected in the bond rate, and the percentage rate of change of s tock prices . Mey er and Glau ber, like A nd ers on, omit replacement inves tment f rom their mod el. Mey er and Glau ber u s e a geometric lag to d es cribe the time s tru ctu re of the inves tment proces s as a whole. For each ind epend ent variable a s eparate f ixed lag is d etermined ; f or example, prof its are lagged one qu arter, whereas the bond rate is lagged three qu ar- ters . The total average lag f or the variables lagged one qu arter-prof its , capacity u til- ization, and s tock prices -is es timated at 8.7 qu arters f or total manu f actu ring. The aver- age lag f or the interes t rate, lagged three qu arters , is 10.7 qu arters [85, p. 153]. Be- cau s e of the choice of two qu arters , rather than one qu arter, as the lag f or inves tment expend itu res as a d epend ent variable, the s hape of the lag d is tribu tion is rather pecu - liar. Change in prof its , capacity u tilization, or s tock prices has no impact f or one qu arter. The impact in the s econd qu arter is .207 of the long-ru n ef f ect of the d eterminants of inves tment on the actu al level of expend i- tu res . There is then a one-qu arter gap with no impact, f ollowed by an impact of .164, and s o on, with zero ef f ects and geometrically d eclining ef f ects f or alternate qu arters . Mey er and Glau ber characterize each two- d igit ind u s try of manu f actu ring by this ty pe of lag d is tribu tion. A f ormal vers ion of the Mey er-Glau ber mod el, where A t repres ents inves tment in cons tant prices , is : (6) A t = B,o + /31(T - V)t-1 + '2CMt_- /A S P\ +- 3rt-3 + 04 S Pt-l + s 5A t-2 + o6Q1 + /7Q2 + s 8Q3 + Et. The variable T-V is net prof it plu s d epre- ciation expens e les s d ivid end s ; it corres pond s to A nd ers on's RED. The variable CM is the ratio of prod u ction to capacity , where pro- d u ction is meas u red by the FRB ind ex of ind u s trial prod u ction and capacity by the McGraw-Hill capacity ind ex. The variable r is Mood y 's corporate bond rate; S P is S tand ard and Poor's ind ex of the prices of 425 ind u s trials ; A S P/S P is the percentage rate of change of this price ind ex. The vari- ables Q1, Q2, and Q3 are s eas onal d u mmy variables , as in A nd ers on's mod el. To apprais e the empirical f ind ings of Mey er and Glau ber, it wou ld be d es irable to employ the s ame proced u re as f or A nd ers on's mod el, namely , to tes t each of the propos ed d eter- minants of inves tment f or s ignif icance by means of S chef f e's S -method . Unf ortu nately , Mey er and Glau ber d o not report s tand ard errors f or their f itted regres s ion coef f icients [85, 1964, pp. 155 and 157]. However, they d o report coef f icients that have the wrong s ign and coef f icients that have the right s ign and are s tatis tically s ignif icant by "conven- tional" t-tes ts at one-tailed levels of s ignif i- cance of .05 and .01. Thes e levels of s ignif i- cance are, of cou rs e, inappropriate where more than one coef f icient in a regres s ion is tes ted f or s ignif icance [99, 1959, p. 80]. The level of s ignif icance of the tes t criterion f or the S -method corres pond ing to Mey er and Glau ber's "conventional" one-tailed level of s ignif icance of .01 is greater than .10. The res u lts are tabu lated in Table 2. The nu mber of s ignif icant coef f icients of the right s ign is , of cou rs e, over-s tated relative to the nu m- ber pres ented f or the A nd ers on mod el in 1120 This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1121 TA BLE 2 S IGNIFICA NCE OF DETERMINA NTS OF INVES TMENT EXPENDITURES , MEYER- GLA UBER MODEL, THIRTEEN INDUS TRY GROUPS , 19501-19581V (F>.10;4,27= 1.92, S = 2.8) Coef f icient Right S ign Determinant Coef f icient S ignif - Ins iglif - Wrong icant icant S ign T-V 7 5 1 CM 3 7 3 r 3 8 2 A S P/S P 1 8 4 S ou rce: Mey er and Glau ber [85, 1964, Tables VII-5 and VII-6, pp. 155 and 157]. Table 1. Nevertheles s , a nu mber of conclu - s ions s tand ou t. Net prof its plu s d epreciation les s d ivid end s T - V is the only clearly s ig- nif icant d eterminant of inves tment inclu d ed in the Mey er-Glau ber mod el. Capacity u tilization CM and the interes t rate r are barely s ignif icant. The change in s tock prices A S P/S P is clearly ins ignif icant. Thes e res u lts are d iametrically oppos ed to the res u lts of A nd ers on. 3.4. Res ek's s tu d y of inves tment A third econometric mod el of inves tment expend itu res bas ed on Du es enberry 's theory of inves tment is that of Robert Res ek. In the Res ek mod el the d eterminants of inves t- ment expend itu res inclu d e ou tpu t, change in ou tpu t, the rate of interes t, a meas u re of d ebt capacity , and an ind ex of s tock prices [98, 1966, p. 325]. The d epend ent variable is gros s inves tment, d ef lated by a price ind ex f or inves tment good s and d ivid ed by capital s tock. Ou tpu t and change in ou tpu t are d i- vid ed by capital s tock, bu t the other d eter- minants of inves tment enter the regres s ion d irectly . Replacement inves tment is as s u med to be proportional to capital s tock, s o the rate of replacement is incorporated into the cons tant term in the regres s ion. Capital s tock is meas u red by the d eclining balance method s o Res ek's treatment of replacement is in- ternally cons is tent [98, p. 327]. The d ebt capacity variable d epend s on the ratio of d ebt les s retained earnings to the as s ets of the f irm [98, pp. 323-24]. This variable pro- vid es an alternative meas u re of d ebt capacity to that employ ed by A nd ers on. Retained earnings enter the d etermination of d ebt capacity bu t are not inclu d ed as a s eparate variable. Res ek employ s a f ixed lag d is tribu tion f or all variables entering the mod el of inves t- ment behavior [98, pp. 325-27]. The weights in this lag d is tribu tion are taken d irectly f rom a regres s ion of inves tment expend itu res on capital appropriations f itted by A lmon [1, 1965]. This treatment of the lag s tru ctu re is s imilar to A nd ers on's , bu t A nd ers on inclu d es s eparate lags f rom the d eterminants of d e- s ired capital to inves tment d ecis ions , f rom d ecis ions to capital appropriations , and f rom appropriations to actu al expend itu res . A nd ers on f ind s that the expectations lag is one qu arter and that a d ecis ion lag of three qu arters provid es the bes t f itting inves tment f u nction. The average lag f rom appropria- tions to inves tment expend itu res is two and a half qu arters f or all ind u s tries in A nd ers on's s tu d y . The average lag f rom appropriations to inves tment expend itu res generally f alls between two and a half and three qu arters in A lmon's s tu d y ; the weights are d eter- mined s eparately f or each ind u s try [1, A lmon and 98, Res ek, p. 329 ]. Res ek employ s A lmon's weights with all variables lagged one qu arter; in ef f ect, he as s u mes that ex- pectations and d ecis ion lags are one qu arter. This as s u mption is d irectly contrad icted by A nd ers on's res u lts , imply ing that Res ek's characterization of the time s tru ctu re of the inves tment proces s is invalid . Res ek pres ents three alternative mod els f or d etermination of inves tment expend i- tu res ; a f ormal vers ion of the bes t-f itting mod el is : This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1122 Jou rnal of Economic Literatu re A t - = /0 + i1Q1 + #2Q2 + #3Q3 Kt + (A O) L, + 6rL,t 1 + #6 D-F A 1 - A L,t + 37S PL,t + Et. In this mod el the s u bs cript L ref ers to a moving average of the corres poind ing vari- able with A lmon weights . The variable A O is change in ou tpu t over f ou r qu arters , where ou tpu t i-s meas u red as the FRB ind ex of ind u s trial prod u ction. The variable r is the interes t rate, meas u red by Mood y 's A A A ind u s trial bond rate as in the Mey er-Glau ber mod el. The variable (D-F)/A is d ebt ca- pacity , meas u red f rom the FTC -S EC Qu arterly Financial Report and M is a con- s tant. The variable S P is the S EC s tock price ind ex f or the ind u s try [98, p. 332]. The variables Ql, Q2 and Q3 are s eas onal d u mmy variables as in the A nd ers on and Mey er- Glau ber mod els . To apprais e Res ek's empirical f ind ings we employ the s ame proced u re as f or A nd er- s on's mod el. The res u lts are given in Table 3. The interes t rate r and s tock price S P are clearly s ignif icant d eterminants of inves t- ment expend itu res . Change in ou tpu t A O is s omewhat les s s ignif icant bu t the nu ll hy - pothes is that the corres pond ing coef f icients are all equ al to zero is clearly rejected . The d ebt capacity variable is s ignif icant with the wrong s ign in two ind u s tries and s ignif icant with the right s ign in f ou r ind u s tries . This variable is of marginal s ignif icance in the explanation of inves tment behavior. In gen- eral, Res ek's res u lts appear to corroborate A nd ers on's f ind ings rather than thos e of Mey er and Glau ber. Debt capacity has little or no role to play in explaining inves tment behavior. The rate of interes t and the price of corporate s ecu rities , as s ociated with the cos ts of external f u nd s , are s ignif icant d eter- TA BLE 3 S IGNIFICA NCE OF DETERMINA NTS OF INVES TMENT EXPENDITURES , RES EK MODEL, THIRTEEN INDUS TRY GROUPS , 1953I-19621V (F.05; 4,32 = 2.67, S 8.83) S ignif icant Ins ignif icant Deter- Coef f icients Coef f icients minant Right Wrong Right Wrong S ign S ign S ign S ign A O/K 5 7 1 r 8 4 1 1 D-F 4 2 5 2 M - A S P 8 3 2 S ou rce: Res ek [98, 1966, Table 4, p. 8382]. minants of inves tment behavior. Change in ou tpu t play s an important role in d etermin- ing the level of inves tment. 3.5. Evans ' s tu d y of inves tment A f ou rth s tu d y of inves tment behavior bas ed on Du es enberry 's theory of inves tment is that of M. K. Evans . The d eterminants of inves tment in the Evans mod el inclu d e ca- pacity u tilization, capital s tock, s ales , cas h f low, and the interes t rate [37, 1967, pp. 153-55]. Capacity u tilization is meas u red as the Wharton S chool capacity ind ex; this ind ex is calcu lated f rom the FRB ind ex of ind u s trial prod u ction, as f ollows : ... the method involves marking of f cy clical peaks f or each of thirty component ind exes of the Fed eral Res erve Board 's Ind ex of Ind u s trial Prod u ction and then f itting linear s egments between s u cces s ive peaks . Between the pres ent time period and the las t es tablis hed peak, the previou s line s egment is extrapolated at its es tablis hed s lope u nles s the ind ex in the pres ent period exceed s the extrapolated trend line. In this cas e a new s lope is com- pu ted by f itting a new linear line s egment f romthe las t cy clical peak to the pres ent valu e of the ind ex [72, Klein and Pres ton, 1967, p. 34]. This proced u re is s imilar to that involved in compu ting A nd ers on's S -S max variable, ex- cept that capacity is extrapolated linearly This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1123 f rom previou s peak ou tpu t rather than s et equ al to s ales at the previou s peak. Cas h f low is meas u red as prof its af ter taxes plu s d epreciation les s d ivid end s , which is id enti- cal to the cas h f low variable employ ed by Mey er and Glau ber. The interes t rate is Mood y 's A A A bond rate. Cas h f low is d e- f lated by the inves tment good s price ind ex. S ales are d ef lated by the wholes ale price ind ex exclu d ing f arm commod ities . Evans as s u mes that replacement is propor- tional to the average of capital s tock lagged f ive and s ix qu arters [37, 1967, p. 153]. This as s u mption implies that the d ecline in ef f i- ciency of inves tment good s is zero u ntil f ive qu arters have elaps ed and that relative ef f iciency is 1-6/2 in the f if th qu arter, 1-6 in the s ixth qu arter, 1-36/2 in the s eventh qu arter, and s o on. No ju s tif ication f or this relative ef f iciency f u nction is of f ered by Evans . Capital s tock is meas u red by d e- f lating net f ixed as s ets by a price ind ex of inves tment good s . No ef f ort is mad e to cor- rect book valu es of gros s f ixed as s ets or accu mu lated d epreciation allowances f or variations in the cos t of acqu is ition of in- ves tment good s . A ccou nting d epreciation is not calcu lated on the bas is of the mortality d is tribu tion f or inves tment good s as s u med by Evans , s o his treatment of replacement inves tment is internally incons is tent. Evans employ s a d ou ble d is tribu ted lag mod el bas ed on the geometric d is tribu ted lag f u nction. In terms of d es ired capital, the lag s tru ctu re may be repres ented in the f orm: Kt + - o r[Kt-,-5 + Kt- T6] 2 00 -1-o + Xl X2 =2 E XoTK+t-- +_ 2 X X or[K+ t-,5 + K+t-Tr-6], Tr=O or: xl Kt- XoKt-, + - [Kt-5 + Kt-6] 2 = A 2K+t_ I + - XO + Xl - X2 2 [K+t_s + K+t-6]. A d d ing replacement inves tment this rela- tions hip becomes : 1 - XO + Xl - X2] It = 2K'+t-l +2 * [K+t-5 + K+ t6] + [Xo -]Kt_ + [ 2] [Kt5 + Kt-6], where 3 is the rate of replacement. If K+ involves an u nknown parameter, the param- eters X1 and 8 cannot be id entif ied f rom this relations hip. It is impos s ible to analy ze Evans ' d is tribu ted lag f u nction withou t f u rther inf ormation. Evans s u bs titu tes capacity u tilization f or the terms in Kt-1+ and Kt-1. He makes d e- s ired capital in the term Kt6++Kt6+ a linear f u nction of s ales , cas h f low, and the interes t rate. Denoting Kt-5++Kt6+ by Ks 6+, and s o on, a f ormal vers ion of the Evans mod el may be repres ented as f ollows : (8) A t = o + #1Cp1 + #2S 56 + 33K56 + f 34L56 + i56, where Cpl is capacity u tilization lagged once, S 56 is the s u m of s ales lagged f ive and s ix period s , K66 is the s u m of s imilarly lagged capital s tock, L46 is the s u m of lagged cas h f low, and iv is the s u m of lagged interes t rates [37, Evans , 1967, p. 156]. Capacity u tilization Cp is the Wharton S chool capac- ity ind ex, s ales S and cas h f low L are taken f rom the S EC-FTC Qu arterly Financial Report, capital K is a book valu e compu ted f rom the s ame d ata, and i is Mood y 's A A A corporate bond rate, the interes t rate em- ploy ed by Mey er and Glau ber and by Res ek. To apprais e Evans ' res u lts , we employ the s ame proced u re as f or the A nd ers on and Res ek mod els ; the res u lts are pres ented in Table 4. From this table it is clear that s ales and capacity u tilization are s ignif icant d e- This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1124 Jou rnal of Economic Literatu re TA BLE 4 S IGNIFICA NCE OF DETERMINA NTS OF INVES T- MENT EXPENDITURES , EVA NS MODEL, THIRTEEN INDUS TRY GROUPS , 19491-19631V (F.05;5,54= 2.39, S =3.5) S ignif icant Ins ignif icant Deter- Coef f icients Coef f icients minant Right Wrong Right Wrong S ign S ign S ign S ign Cp 9 3 1 K 2 2 6 3 S 6 6 1 L 3 6 4 i 3 7 3 S ou rce: Evans [37, 1967, Table 1, p. 156]. terminants of d es ired capital. Capacity u tili- zation Cp is s ignif icant f or 9 of the 13 in- d u s try grou ps and has the wrong s ign f or only one. S ales S is a s ignif icant variable f or s ix ind u s tries and als o has only one wrong s ign. Capital s tock K, meas u red as the book valu e of net f ixed as s ets d ef lated by the cu r- rent price ind ex f or inves tment good s , is s ig- nif icant f or f ou r ind u s tries ; the s ign is pos i- tive f or two of thes e ind u s try grou ps and negative f or two. The s ign of the coef f icient of capital s tock d epend s on the relative mag- nitu d e of the rate of replacement a and the ad ju s tment coef f icient Xi. If replacement re- qu irements pred ominate, the coef f icient of capital s tock has a pos itive s ign; we take this s ign to be the right one. A lternatively , if the ad ju s tment coef f icient pred ominates , the co- ef f icient of capital s tock is negative. Cas h f low L anid the interes t rate i are barely s ig- nif icant as d eterminants of inves tment ex- pend itu res . Each one is s ignif icant f or only three ind u s try grou ps ; wrong s igns occu r f or the coef f icients of cas h f low in f ou r ind u s tries and f or the interes t rate in three ind u s tries . Upon empirical tes ting the Evans mod el re- d u ces to an ord inary f lexible accelerator with d es ired capital proportional to ou tpu t. 3.6. Eis ner's accelerator mod el We have reviewed the application of Eis - ner's mod el of inves tment to time s eries d ata f or ind ivid u al f irms . We next review Eis ner's s tu d y of inves tment behavior f or ind u s try grou ps . The d eterminants of inves tment in- clu d e changes in s ales , changes in prof its , and , f or replacement inves tment, level of capital s tock. Inves tment net of replacement equ als a weighted average of pas t changes in ou tpu t. Changes in prof its are introd u ced as a pos s ible repres entation of changes in "the expected prof itability of inves tment" [31, Eis ner, 1965, p. 97]. In an earlier s tu d y the relations hip of this mod el to the theory of the f irm is characterized by Eis ner as f ollows : ... The acceleration principle whos e manif es tations we s hall note and inves tigate is not the s imple f irs t or s econd ord er d if f erence equ ation f requ ently pres ented , pres u mably in the interes t of ped agogical clarity r. Rather, we have in mind a world of ris k and u ncertainty in which bu s ines s f irms s trive to maximize the mathe- matical expectation of s ome monotonic increas ing f u nc- tion of expected f u tu re prof it, s u bject to a prod u ction f u nction with d ecreas ing marginal retu rns to each f actor and pos itive cros s partial d erivatives . This means , in particu lar, that f or a f irminitially in equ ilibriu mit pay s to increas e the s tock of capital f or permanent or cer- tainly expected increas es in d emand f or ou tpu t [26, 1960, p. I]. Eis ner treats the time s tru ctu re of inves t- ment behavior as a mod if ication of Koy ck's d is tribu ted lag f u nction, with weights d eter- mined arbitrarily f or the f irs t lagged valu es of prof its and s ales and then d eclining geo- metrically [29, 1962. p. 198]. He has applied the complete mod el to d ata f rom the OBE- S EC S u rvey f or total d u rable and total non- d u rable manu f actu ring ind u s tries f or the realization of inves tmernt expend itu res , given anticipations . He has als o applied s imilar mod els to annu al inves tment expend itu re d ata f rom the McGraw-Hill S u rvey f or in- This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1125 d u s try grou ps [26, p. II]. For this annu al d ata he characterizes the inves tment proces s time s tru ctu re by a f inite d is tribu ted lag f u nction. Eis ner's s pecif ication of the d eterminants of inves tment expend itu res and of the time s tru ctu re of the inves tment proces s f or qu arterly time s eries is the f ollowing: A t = jB3 + IBlA S t-1 + 321A S t-2 (9) + f l3A Pt-1 + t4A Pt-2 + #3A t_j + #6Kt + ,e. In this mod el A S is change in s ales , A P is change in prof its , K is capital s tock at the beginning of the period . The lagged valu e of inves tment expend itu res is introd u ced to repres ent the ef f ects of changes in s ales and prof its lagged more than two period s ; the weights as s ociated with thes e changes d ecline geometrically . S ales are d ef lated by the wholes ale price ind ex f or each ind u s try grou p and prof its are d ef lated by the price ind ex of inves tment good s . Capital s tock is meas u red by the d eclining balance method s o that Eis ner's treatment of replacement inves t- ment in the s tu d y of ind u s try grou ps , u nlike his treatment in the s tu d y of ind ivid u al f irms , is internally cons is tent. No overall apprais al of Eis ner's mod el on the bas is of res u lts f or ind ivid u al ind u s try grou ps can be mad e becau s e Eis ner has f itted the mod el only f or realizations of inves tment expend i- tu res and only f or the totals of d u rable and nond u rable manu f actu ring ind u s tries [31, 1965, p. 105]. For thes e grou pings only one of the f ou r coef f icients as s ociated with change in prof its exceed s its s tand ard error. A f ter empirical tes ting, Eis ner's mod el red u ces to the f lexible accelerator of Chenery and Koy ck. 3.7. Hickman's s tu d y of inves tment The d eterminants of inves tment behavior in Hickman's mod el are ou tpu t, capital s tock, wage rate, rental price of capital, price of ou tpu t and a time trend [57, 1965, pp. 28-32]. Hickman employ s a logarithmic f orm of the f lexible accelerator, s imilar to that u s ed by Koy ck, 00 ln Kt = x&4[Xi ln K+t-T + X2 ln K+tr_i T=O + (1 - XO - Xl - X2) ln K+tr_2]. In Koy ck's f orm of the d is tribu ted lag f u nc- tion 1-Xo-X1-X2=0 and X2 = 1-XO-1- Hickman d is tingu is hes between an expecta- tions lag in the d etermination of d es ired capital and an ad ju s tment lag between actu al and d es ired capital; as s u ming a cons tant rate of ad ju s tment, he id entif ies the two lags s eparately [57, 1965, pp. 36-38]. Hickman makes the logarithm of d es ired capital a linear homogeneou s f u nction of ou t- pu t and a price ratio. The price ratio is taken, alternatively , as the wage rate d i- vid ed by the rental price of capital and the rental price of capital d ivid ed by the price of ou tpu t. The mod el is completed by ad d - ing a time trend . The mod el is f itted to annu al d ata f or 1949-60, a total of twelve annu al obs ervations . A s many as eight co- ef f icients are d etermined f rom thes e d ata- three ou tpu t terms , three price terms , the coef f icient of the time trend and a cons tant term. A f ormal vers ion of the mod el u s ed by Hickman to analy ze d ata f or ind ivid u al in- d u s try grou ps within manu f actu ring is : ln Kt - ln Kt-, - 3o + f 1T + 32(ln Yt - In K7t1) + ,33(ln Yt1 - In Kt-1) +( 4(ln Yt-2 - ln Kt-1) + 5 ln Pt +36 Iln Pt- + 37 In Pt-2 + ,t where Y is ou tpu t, K is capital s tock, P is a price ratio, and T a time trend . Capital s tock is es timated by Hickman u s ing d e- clining balance replacement or, equ ivalently , a geometric mortality d is tribu tion. Ou tpu t is meas u red as real gros s prod u ct originating This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1126 Jou rnal of Economic Literatu re in each ind u s try , es timated by the OBE. The price of ou tpu t is the price ind ex implicit in nominal and real gros s prod u ct originating, as es timated by the OBE. The rental price of capital s ervices is the prod u ct of the in- ves tment good s price ind ex and the s u m of interes t and d epreciation rates . The d epre- ciation rate is a cons tant equ al to the re- placement rate; the interes t rate is Mood y 's A A A ind u s trial bond rate. The wage rate is employ ee compens ation per man-hou r as es timated by Charles S chu ltze [57, 1965, pp. 42-44]. A f ter a comparis on of alternative pos s ible s pecif ications , Hickman's mod el, like that of Eis ner, red u ces to the f lexible accelerator mod el of Chenery and Koy ck. Except f or the pres ence of a third lagged term in ou tpu t, the lag s pecif ication is the s ame as that employ ed by Koy ck [57, 1954, pp. 54-56]. 3.8. Bou rneu f 's s tu d y of capacity and inves t- ment The d eterminants of inves tment behavior in Bou rneu f 's mod el are limited to ou tpu t and capacity [10, 1964, p. 609]. A f ormal vers ion of this mod el is : A t = )3o + 31(Ct- -Yt-1) + 32Cb,t + f 33A Yt + Et, where C is average capacity d u ring the pe- riod , Cb capacity at the beginning of the period and Y is ou tpu t. Ou tpu t is meas u red by the Fed eral Res erve Board ind ex of in- d u s trial prod u ction, and capacity is meas u red by the McGraw-Hill capacity ind ex f or each ind u s try [10, pp. 608-09]. Capacity at the beginning of the period Cb is intend ed to ad - ju s t f or the ef f ect of replacement inves tment. The lag s tru ctu re implicit in this relations hip can be brou ght ou t by letting A t-132Gb, repres ent net inves tment. Then: A Kt == /0 + 33 Yt-(#1 + 03) Y1 (11) : + 0 Kt-1, a where c = K/C, the ratio of capital s tock to capacity . This relations hip is an arithmetic vers ion of Koy ck's f lexible accelerator. The relations hip d es cribed above is f itted to annu al d ata f or 13 ind u s try grou ps , 1950- 61 [10, pp. 617-18]. To apprais e the res u lts we emplov S chef f e's S -method as bef ore; tes ts of s ignif icance are given in Table 5. The d if f erence between capacity and ou tpu t is a highly s ignif icant d eterminant of inves tment expend itu res with s ignif icant coef f icients with the right s ign f or 7 of the 13 in- d u s tries . Capacity at the beginning of the period , repres enting replacement requ ire- ments generated by exis ting capital s tock, is als o s ignif icant as a d eterminant of inves t- ment with s ignif icant coef f icients with the right s ign in 5 of the 13 ind u s tries . Only the change in ou tpu t is barely s ignif icant as a d eterminant of inves tment. Thes e res u lts s u bs tantiate the conclu s ions of A nd ers on, Res ek, Evans , Eis ner, and Hickman that capacity u tilization is an important d eter- minant of inves tment expend itu res . 3.9. Jorgens on and S tephens on's s tu d y of in- ves tment The f inal s tu d y of inves tment by ind u s try grou ps to be inclu d ed in ou r s u rvey is that of Jorgens on and S tephens on [67, 1967]. We have reviewed the application of mod els TA BLE 5 S IGNIFICA NCE OF DETERMINA NTS OF INVES TMENT EXPENDITURES , BOURNEUF MODEL, THIRTEEN INDUS TRY GROUPS , 1950-1961 (F.05;3,8= 4.07, S = 3.5) S ignif icant Ins ignif icant Deter- Coef f icients Coef f icients minant Right Wrong Right Wrong S ign S ign S ign S ign C-Y 7 5 1 Gb 5 7 1 A Y 3 8 2 S ou rce: Bou rneu f [10, 1964, Table 4, pp. 617-18]. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1127 bas ed on optimal capital accu mu lation to time s eries d ata f or ind ivid u al f irms by Jorgens on and S iebert. The mod el employ ed in analy zing time s eries d ata f or ind u s try grou ps by Jorgens on and S tephens on corre. s pond s to the Jorgens on-S iebert mod el, Neo- clas s ical II; capital gains are regard ed as trans itory s o retu rn to equ ity is meas u red ex- clu d ing capital gains . The Jorgens on-S tephens on mod el takes the f orm: A t = ,Oo + ,IA (-) + 2A 2 (-) c t-4 c t_ 5 + ,.3 (PQ ) + 4A 4 (-) c t-6 c t-7 + ,35(A - S K)t_ + 36(A - S K)t2 + /37Kt + et. In this mod el pQ-is gros s valu e ad d ed in cu r- rent prices ; c is the price of capital s ervices , d ef ined as : 1 u v -u w c == q 1- + 1---r, where q is the p rice of inves tment good s , a the rate of replacement, r the cos t of capital, u the tax rate, v theproportionof d epreciation d ed u ctible f rom income f or tax pu rpos es , and w the proportion of the cos t of capital d e- d u ctible f rom income. Capital s tock at the beginning of the period K is es timated f rom inves tment d ata, u s ing a perpetu al inventory method bas ed on d eclining balance replace- ment. The valu e of ou tpu t is taken to be gros s valu e ad d ed in each ind u s try ; com- ponents of valu e ad d ed and the tax s tru c- tu re are taken f rom the U.S . national income and prod u ct accou nts , d is tribu ted by qu ar- terly d ata f rom the S EC-FTC Qu arterly Financial Report. The cos t of capital is the ratio of retu rn to capital net of d epreciation to the market valu e of the f irm [67, p. 218]. Jorgens on, J. Hu nter, and M. I. Nad iri have compared the perf ormance of the Jorgens on- S tephens on mod el with that of the A nd ers on, Eis ner and Mey er-Glau ber mod els f or qu arterly d ata on inves tment expend itu res f or f if teen two-d igit ind u s try grou ps within manu f actu ring f or the period 1949- 64 [62, 1970 and 63, 1970]. The Eis ner mod el ef f ectively red u ces to the f lexible ac- celerator of Chenery and Koy ck; s imilarly , the Bou rneu f , Evans , and Hickman mod els are es s entially vers ions of the f lexible ac- celerator mod el with d es ired capital propor- tional to ou tpu t. The A nd ers on, Mey er- Glau ber, and Res ek mod els incorporate in- ternal f u nd s , the cos t of external f u nd s , and capacity u tilization as d eterminants of in- ves tment expend itu res . In the Mey er- Glau ber mod el only internal f u nd s emerge as a s ignif icant d eterminant of inves tment. In the A nd ers on and Res ek mod els only capac- ity u tilization and the cos t of external f u nd s are s ignif icant. A mong the mod els compared by Jorgen- s on, Hu nter, and Nad iri, the bes t explanation of inves tment behavior f or ind ivid u al ind u s - try grou ps is provid ed by the Jorgens on- S tephens on mod el [62, 1970, pp. 206-09]. This mod el is s u perior to the A nd ers on and Mey er-Glau ber mod els f or f ou rteen of f if teen ind u s try grou ps and to the Eis ner mod el f or eleven of f if teen grou ps . The s econd - ranking mod el is the Eis ner mod el; it is s u perior to the Mey er-Glau ber mod el f or twelve of f if teen ind u s try grou ps and to the A nd ers on mod el f or all f if teen grou ps . Finally , the Mey er-Glau ber mod el is s u perior to the A nd ers on mod el f or eleven of the f if teen grou ps . In terms of the mod els of in- ves tment behavior f or ind ivid u al f irms , thes e res u lts may be s u mmarized as f ollows : 1. Neoclas s ical 2. A ccelerator 3. Liqu id ity This ranking coincid es with that f or ind ivi- d u al f irms bas ed on the res u lts of Jorgens on and S iebert [65, 1968, pp. 1142-43]. 4. S u mmary and Conclu s ion 4.1. S u mmary The main f eatu res of econometric mod els of inves tment behavior inclu d ed in ou r s u r- vey are s u mmarized in Table 6. We can com- pare alternative mod els with res pect to d e- This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions TA BLE 6 COMPA RIS ON OF A LTERNA TIVE INVES TMENT FUNCTIONS A . Ind ivid u al Firms , A nnu al Obs ervations Determinants of Time S tru ctu re of Replacement Des ired Capital Inves tment Proces s Inves tment Eis ner McGraw-Hill d ata on plant Change in s ales , d ef lated by Finite d is tribu ted lag f u nc- Replacement rate and equ ipment expend i- ind u s try wholes ale price in- tion. proportional to d e- tu res , d ef lated by an im- d ex; prof its , d ef lated by in- preciation charges plicit price d ef lator f or pro- ves tment price ind ex; d e- d ivid ed by gros s d u cers d u rable equ ipment preciation; rate of retu rn; f ixed as s ets . and non-res id ential con- valu e of the f irm. s tru ction, 1955-62. Gru nf eld Mood y 's d ata on gros s ad - Valu e of the f irm, d ef lated Geometric d is tribu ted lag Replacement pro- d itions to plant and equ ip- by the implicit price d ef lat- f u nction. portional to net ment plu s maintenance and or f or gros s national prod - capital s tock. repairs , d ef lated by an im- u ct; Mood y 's A aa corpo- plicit price d ef lator f or rate bond rate. prod u cers ' d u rable equ ip- ment, 1935-54. Jorgen- Mood y 's d ata on gros s ad d i- Gros s valu e ad d ed in cu r- Rational d is tribu ted lag Replacement pro- s on- tions to plant and equ ip- rent prices ; price of inves t- f u nction. portional to net S iebert ment, d ef lated by an implic- ment good s ; d epreciation; capital s tock. it d ef lator f or prod u cers ' rate of retu rn; rate of d u rable equ ipment and growth of the price of in- non-res id ential cons tru c- ves tment good s ; tax s tru c- tion, 1937-63. tu re. Ku h Mood y 's d ata on gros s ad d i- S ales and retained earnings Geometric d is tribu ted lag Replacement pro- tions to plant and equ ip- plu s d epreciation, d ef lated f u nction. portional to gros s ment, d ef lated by an implic- by inves tment price ind ex. capital s tock. it price d ef lator f or prod u c- ers ' d u rable equ ipment and non-res id ential cons tru c- tion, 1935-55. B. Ind u s try Grou ps , A nnu al Obs ery ations Bou rneu f OBE-S EC d ata on plant FRB ind ex of ind u s trial Weight of f irs t valu e of ou t- Replacement pro- and equ ipment expend i- prod u ction; McGraw-Hill pu t (FRB ind ex) arbitrary ; portional to capac- tu res , d ef lated by an implic- capacity ind ex. remaining weights d eclining ity . it price d ef lator f or prod u c- geometrically . ers ' d u rable equ ipment and non-res id ential cons tru c- tion, 1950-61. Hickman OBE-S EC d ata on plant Gros s prod u ct originating Weight of f irs t two valu es Replacement pro- and equ ipment expend i- in cons tant prices ; price of of ou tpu t (gros s prod u ct) portional to net tu res , d ef lated by Boeckh capital s ervices ; wage rate; and price ratio arbitrary ; capital s tock. cons tru ction cos t ind ex f or implicit price d ef lator f or remaining weights d eclining plant and wholes ale price gros s prod u ct originating. geometrically . ind ex f or prod u cer f inis hed good s f or equ ipment, 1949- 60. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions C. Ind u s try Grou ps , Qu arterly Obs ervations Data and Time Period Determinants of Time S tru ctu re of Replacement Des ired Capital Inves tment Proces s Inves tment A nd ers on OBE-S EC d ata on plant S ales les s previou s maxi- Fou r qu arter moving aver- Omitted . and equ ipment expend i- mu m s ales ; retained earn- age of each of the d etermi- tu res , u nd ef lated , not s ea- ings plu s d epreciation; nants u s ed as ind epend ent s onally ad ju s ted ; qu arterly s tocks of government s ecu - variables ; time trend in- d u mmy variables inclu d ed rities ; accru ed tax liability ; clu d ed to repres ent lag in as ind epend ent variables ; d ebt capacity ; Treas u ry bill expectations ; d ecis ion lag f irs t qu arter, 1949, to f ou rth rate. taken to be f ixed . qu arter, 1958. Eis ner OBE-S EC d ata on plant Change in s ales , d ef lated by Weight of f irs t valu es of Replacement pro- and equ ipment expend i- ind u s try wholes ale price in- change in s ales and change portional to net tu res , d ef lated by an implic- d ex; change in prof its , d e- in prof its arbitrary ; remain- capital s tock. it d ef lator f or prod u cers f lated by inves tment price ing weights d eclining geo- d u rable equ ipment and non- ind ex. metrically . res id ential cons tru ction, ad - ju s ted f or s eas onal varia- tions ; third qu arter, 1948, to f ou rth qu arter, 1960. Evans OBE-S EC d ata on plant S ales , d ef lated by wholes ale Three-parameter rational Replacement pro- and equ ipment expend i- price ind ex exclu d ing f armd is tribu ted lag f u nction. portional to aver- tu res , d ef lated by an implic- commod ities ; Wharton in- age of net capital it d ef lator f or prod u cers ' d ex of capacity u tilization; s tock lagged f ive d u rable equ ipment and non- retained earnings plu s d e- and s ix qu arters . res id ential cons tru ction, ad - preciation, d ef lated by in- ju s ted f or s eas onal varia- ves tment price ind ex; tions ; f irs t qu arter, 1949, to Mood y 's A A A corporate f ou rth qu arter, 1963. bond rate. Jorgen- OBE-S EC d ata on plant Gros s valu e ad d ed in cu r- Rational d is tribu ted lag Replacement pro- s on- and equ ipment expend i- rent prices ; price of inves t- f u nctions . portional to net S tephen- tu res , d ef lated by an implic- ment good s ; d epreciation, capital s tock. s on it d ef lator f or prod u cers ' rate of retu rn; tax s tru c- d u rable equ ipment and non- tu re. res id ential s tru ctu res , ad - ju s ted f or s eas onal varia- tions ; f irs t qu arter, 1949, to f ou rth qu arter, 1960. Mey er- OBE-S EC d ata on plant Capacity u tilization-ratio Weights alternately zero Omitted . Glau ber and equ ipment expend i- of FRB ind ex of ind u s trial and d eclining geometrically . tu res , d ef lated by an implic- prod u ction to McGraw-Hill it d ef lator f or prod u cers ' capacity ind ex; retained d u rable equ ipment and non- earnings plu s d epreciation, res id ential cons tru ction, not d ef lated by inves tment s eas onally ad ju s ted ; qu ar- price ind ex; Mood y 's A A A terly d u mmy variables in- corporate bond rate; change clu d ed as ind epend ent vari- in S tand ard and Poor's ables ; f irs t qu arter, 1950, to s tock price ind ex. f ou rth qu arter, 1958. Res ek OBE-S EC d ata on plant Change in FRB ind ex of in- Finite d is tribu ted lag f u nc- Replacement pro- and equ ipment expend i- d u s trial prod u ction; d ebt tion, weights d etermined portional to net tu res , d ef lated by an implic- capacity ; Mood y 's A A A f romregres s ion of expend i- capital s tock. it d ef lator f or prod u cers corporate bond rate; S EC tu res on appropriations . d u rable equ ipment and non- ind u s try s tock price ind ex. res id ential cons tru ction, not s eas onally ad ju s ted ; qu ar- terly d u mmy variables in- clu d ed as ind epend ent vari- ables ; f irs t qu arter, 1953, to to f ou rth qu arter, 1962. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1130 Jou rnal of Economic Literatu re terminants of d es ired capital, the time s tru c- tu re of the inves tment proces s , and the treat- ment of replacement inves tment. Mod els of inves tment behavior d if f er s u bs tantially in all three res pects . For each mod el the d ata and time period of the s tu d y are given in the f irs t colu mn of Table 6. This inf ormation is f ollowed by a lis t of the d eterminants of d e- s ired capital, by a characterization of the time s tru ctu re of the inves tment proces s , and by a d es cription of the treatment of replace- ment inves tment. 4.2. Determinants of d es ired capital The d eterminants of the d es ired level of capital may be d ivid ed into three grou ps : 1) capacity u tilization, repres ented by the ratio of ou tpu t to capacity , the d if f erence between ou tpu t and capacity , change in ou tpu t, s ales les s previou s peak of s ales , and s o on; 2) in- ternal f inance, repres ented by the f low of in- ternal f u nd s , the s tock of liqu id as s ets , d ebt capacity , and accru ed tax liability ; 3) ex- ternal f inance, repres ented by interes t rates , rates of retu rn, s tock prices , the market valu e of the f irm. Ou r f irs t objective is to evalu ate the role of thes e grou ps of variables in the explanation of inves tment behavior. Capacity u tilization appears as a highly s ignif icant d eterminant of the d es ired capital in mos t of the s tu d ies we have cons id ered . Meas u res of capacity u tilization appearing as s ignif icant d eterminants of inves tment in- clu d e A nd ers on's meas u re of s ales les s pre- viou s peak s ales , Bou rneu f 's d if f erence be- tween the FRB ind ex of ind u s trial prod u c- tion and the McGraw-Hill capacity ind ex, and the Wharton S chool capacity ind ex em- ploy ed by Evans . The level of real ou tpu t may be regard ed as a meas u re of capacity u tilization in a relations hip als o inclu d ing capital s tock. Meas u res of ou tpu t employ ed in this way inclu d e d ef lated s ales as employ ed by Ku h, Hickman's real gros s prod u ct originating, Res ek's change in the FRB in- d ex of ind u s trial prod u ction, and the change in d ef lated s ales employ ed by Eis ner in the s tu d y of ind u s try grou ps . Only the Mey er-Glau ber meas u re of ca- pacity u tilization, bas ed on the ratio of the FRB ind ex to the McGraw-Hill capacity in- d ex, f ails to appear as a s ignif icant d eter- minant of d es ired capital. This f ind ing con- f licts s harply with that of Bou rneu f , who f ind s that the d if f erence between thes e variables is highly s ignif icant. Change in d e- f lated s ales d oes not appear as a s ignif icant d eterminant of d es ired capital in Eis ner's time s eries s tu d y f or ind ivid u al f irms . This f ind ing conf licts with Eis ner's res u lts f or lime s eries of ind u s try grou ps . Capacity u tilization or ou tpu t provid es the only s ignif icant d eterminant of d es ired capital f or s everal of the mod els of inves t- ment behavior inclu d ed in ou r s u rvey . Thes e mod els inclu d e Ku h's mod el of f irm time s eries and the mod els of Bou rneu f , Eis ner, Evans , and Hickman f or ind u s try grou ps . A ll of thes e mod els red u ce to the f lexible ac- celerator mod el of Chenery and Koy ck with d es ired capital proportional to ou tpu t. The mos t important d if f erence between the mod - els of inves tment propos ed by Eis ner, Evans , and Hickman and the mod els of Bou rneu f , Chenery , Koy ck, and Ku h is in the charac- terization of the time s tru ctu re of the in- ves tment proces s . We will d is cu s s alternative characterizations of the time s tru ctu re in more d etail below. The s tu d ies of ind ivid u al f irms by Gru n- f eld and by Jorgens on and S iebert and the s tu d y of ind u s try grou ps by Jorgens on and S tephens on are the only s tu d ies we have re- viewed that d o not inclu d e capacity u tiliza- tion or real ou tpu t as a pos s ible explanatory variable. The Jorgens on-S iebert and Jor- gens on-S tephens on mod els embod y a d e- s cription of technology bas ed on a Cobb- Dou glas prod u ction f u nction or, equ iva- lently , a CES prod u ction f u nction with cons tant retu rns to s cale and elas ticity of s u bs titu tion equ al to u nity . Real ou tpu t enters together with the ratio of its price to the price of capital s ervices . The Gru nf eld mod el d oes not inclu d e real ou tpu t as a d eter- minant of inves tment behavior. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1131 A f lexible accelerator mod el with d es ired capital proportional to ou tpu t embod ies a s pecialization of the d es cription of technol- ogy bas ed on the CES prod u ction f u nction [4, 1961]. This s pecialization corres pond s to a d es cription of technology with cons tant re- tu rns to s cale and elas ticity of s u bs titu tion equ al to zero. For a CES prod u ction f u nc- tion with zero elas ticity of s u bs titu tion, the capital-ou tpu t ratio is cons tant and the d e- terminants of inves tment d o not inclu d e the prices of ou tpu t or capital s ervices . The prod u ction f u nction is characterized by f ixed technical coef f icients ; the f ixed coef f cents prod u ction f u nction was originally employ ed by Chenery and Koy ck in d eriving the f lex- ible accelerator mod el of inves tment be- havior. Evid ence on the f orm of the prod u ction f u nction bas ed on d irect es timation of the prod u ction f u nction is pres ented by P. Zarembka f or two-d igit manu f actu ring in- d u s tries f or 1957 and 1958 [108, 1970 and 109, 1969]. Zarembka f irs t tes ts the hy - pothes is that the elas ticity of s u bs titu tion and the s cale parameter are the s ame f or the two y ears . This hy pothes is is accepted ; pro- ceed ing cond itionally , Zarembka tes ts the hy pothes es that the s cale parameter is equ al to u nity and that the elas ticity of s u bs titu - tion is equ al to u nity . Both hy pothes es are accepted , s o the CES prod u ction f u nction re- d u ces to the Cobb-Dou glas with cons tant retu rns to s cale. Z. Griliches has carried ou t a s imilar s tu d y f or 1958; the hy pothes is that d is tribu tion, ef f iciency and s cale parameters are the s ame f or all ind u s try grou ps is em- ploy ed in Griliches ' s tu d y [45, 1967; 46, 1967 and 47, 1968]. This hy pothes is is incons is tent with the evid ence [61]. A ttempts have been mad e to es timate the d egree of retu rns to s cale and the elas ticity of s u bs titu tion f rom marginal prod u ctivity cond itions f or labor and capital by Dhry mes [19, 1965] and by Eis ner and Nad iri [34, 1968]. The res u lts s u gges t increas ing re- tu rns , invalid ating the mod el of prod u ction employ ed by Dhry mes [19, p. 364] and by Eis ner and Nad iri [34, p. 373]. Equ ality be- tween the marginal prod u ct of labor and the real wage, and between the marginal prod u ct of capital and the real rental, are neither neces s ary nor s u f f icient f or prof it maximiza- tion u nd er increas ing retu rns . The res u lts of Eis ner and Nad iri have been traced to an error in the s tochas tic s pecif ication of their mod el by Bis chof f [9, 1969, p. 358].4 Bis chof f f ind s that the res id u als in their d is tribu ted lag f u nction are s erially correlated , s o their es timates of the elas ticity of s u bs titu tion and d egree of retu rns to s cale are incons is tent [9, p. 359].5 When this error is corrected the hy pothes es that the elas ticity of s u bs titu tion and the d egree of retu rns to s cale are equ al to u nity are not rejected [9, Table 2]; the CES prod u ction f u nction red u ces to Cobb- Dou glas f orm with cons tant retu rns to s cale. The hy pothes is of cons tant retu rns to s cale is cons is tent with es timates of the s cale parameter f rom the CES prod u ction f u nc- tion. This hy pothes is can als o be tes ted by analy s is of d ata f rom engineering s tu d ies , growth of f irms by s ize of f irm, and the s ize d is tribu tion of f irms . Und er cons tant retu rns to s cale the optimal policy f or capital ac- cu mu lation d etermines labor-ou tpu t and capital-ou tpu t ratios and the rate of growth of the f irm is ind epend ent of s ize. Bain's analy s is of evid ence f rom engineering s tu d ies s u pports the conclu s ion that retu rns to s cale at the f irm level are increas ing u p to a f irm s ize equ al to the minimu m optimal s ize of plant; bey ond that point plant economies of s cale are cons tant; there are no economies of mu lti-plant operation [5, 1956, pp. 68-82 and 6, 1969]. This evid ence corroborates the f ind ings f rom econometric s tu d ies of the CES prod u ction f u nction that the d egree of re- tu rns to s cale is equ al to u nity . Und er cons tant retu rns to s cale the rate of growth of capital is ind epend ent of s ize of f irm. A n extens ive s tu d y of rates of growth 4The res u lts labeled "cl" in Bis chof f 's Table 1 are f or the d ata employ ed by Eis ner and Nad iri. 6 This erroneotu s s pecif ication is u s ed by Eis ner [28, 1969]; his es timates are als o incons is tent. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1132 Jou rnal of Economic Literatu re of as s ets f or the one thou s and larges t manu - f actu ring f irms in the United S tates f or the period 1946 to 1955 has been mad e by Hy mer and Pas higian [58, 1962 ]. Their con- clu s ion is that rate of growth of as s ets is in- d epend ent of s ize of f irm [58, p. 558]. Ind e- pend ence of the rate of growth of as s ets and f irm s ize implies that the relative s ize d is - tribu tion of f irms is s table over time. This implication is cons is tent with evid ence on concentration ratios in A merican manu f ac- tu ring ind u s tries over the period 1947-63 [69, 1968, p. 241].6 The evid ence on growth of f irms by s ize and the s ize d is tribu tion of f irms f u rther corroborates the f ind ings f rom econometric s tu d ies of the CES prod u ction f u nction that retu rns to s cale are cons tant. Zarembka has pres ented evid ence on the elas ticity of s u bs titu tion f rom d irect es tima- tion of the CES prod u ction f u nction. Given cons tant retu rns to s cale as a maintained hy pothes is , f u rther evid ence on the elas ticity of s u bs titu tion can be obtained f rom es tima- tion of parameters of the marginal prod u c- tivity cond itions f or labor and capital. Zarembka has es timated the elas ticity of s u bs titu tion f rom the marglnal prod u ctivity cond ition f or labor f or cros s s ection obs erva- tions by s tates f or two-d igit manu f actu ring ind u s tries in 1957 and 1958. He f irs t tes ts the hy pothes is that the elas ticity of s u bs titu tion is the s ame f or the two y ears . This hy poth- es is is accepted ; proceed ing cond itionally , Zarembka tes ts the hy pothes is that the elas ticity of s u bs titu tion is equ al to u nity [108, 1970, p. 49]. This hy pothes is is als o accepted s o the CES prod u ction f u nction re- d u ces to the Cobb-Dou glas f orm. Griliches has analy zed d ata s imilar to Zarembka's f or 1957 and 1958. He tes ts the hy pothes is that the elas ticity of s u bs titu tion is equ al to u nity [46, 1967, p. 2992]. A gain, the hy pothes is is accepted , valid ating the Cobb-Dou glas f orm of the prod u ction f u nction. F. W. Bell and P. J. Dhry mes have at- tempted to es timate the elas ticity of s u b- s titu tion f rom d ata on capital inpu t and its rental price [7, 1965 and 19, 1965]. If the ou tpu t-capital ratio is regres s ed on the rental price of capital, the es timated elas ticity of s u bs titu tion is below es timates f rom a regres - s ion of the ou tpu t-labor ratio on the wage rate. The es timates f rom labor d ata agree with d irect es timates of the prod u ction f u nc- tion, bu t the es timates f rom capital d ata d o not. A n obviou s explanation of this apparent d is crepancy is that marginal cond itions with no cos ts of ad ju s tment or ges tation lags are appropriate f or labor bu t not f or capital. The marginal prod u ct of labor is equ al to the real wage, bu t the marginal prod u ct of capital enters a d is tribu ted lag inves tment f u nction of the ty pe f itted by Bis chof f . Bis chof f 's es - timates of the elas ticity of s u bs titu tion are cons is tent with d irect es timates of the pro- d u ction f u nction. For cros s s ection es timates of the prod u ction f u nction and the marginal prod u ctivity cond ition f or labor and time s eries es timates of a d is tribu ted lag inves t- ment f u nction incorporating the marginal prod u ctivity cond ition f or capital, the evi- d ence is cons is tent with an elas ticity of s u bs titu tion equ al to u nity and with con- s tant retu rns to s cale. The as s u mption of cons tant retu rns to s cale that u nd erlies the f ixed coef f icients pro- d u ction f u nction is cons is tent with the evi- d ence we have reviewed on the d es cription of technology . The s econd as s u mption u n- d erly ing the f ixed coef f icients prod u ction f u nction, that the elas ticity of s u bs titu tion is equ al to zero, is d irectly contrad icted by the evid ence we have reviewed [61]. The f ixed coef f icients d es cription of technology is implicit in the mod els of inves tment be- havior employ ed by Bou rneu f , Evans , Hick- man, and Ku h. For Evans , Hickman, and Ku h this characterization emerges as the res u lt of a comparis on among alternative s pecif ications of the inves tment f u nction. The f ixed coef f icients d es cription of technol- ogy has been employ ed by Eis ner in the I The concentration meas u res are ratios of the valu e of s hipments f or the f ou r larges t, eight larges t, and twenty larges t f irms in each f ou r-d igit ind u s try to the valu e of s hipments f or the ind u s try . This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1133 s tu d y of inves tment by ind ivid u al f irms and ind u s try grou ps extend ing over a period of 15 y ears [30, 1967; 26, 1960; 29, 1962; 27, 1963; 25, 1964; 31, 1965; 32, 1969; 28, 1969 and 33, 1970]. The as s u mptions of cons tant retu rns and elas ticity of s u bs titu tion equ al to u nity employ ed by Jorgens on, S iebert, and S tephens on are cons is tent with the evi- d ence we have reviewed . We now tu rn to d eterminants of d es ired capital other than ou tpu t and capacity u tilization. Thes e d eterminants may be d i- vid ed into two grou ps -internal f inance and external f inance. Variables as s ociated with internal f inance d o not appear as s ignif icant d eterminants of d es ired capital in any mod el that als o inclu d es ou tpu t as a s ignif icant d e- terminant. Cas h f low variables employ ed by A nd ers on and Evans are not s ignif icant as d eterminants of inves tment; es s entially the s ame variable appears as the only s ignif icant d eterminant in the Mey er-Glau ber mod el. The res u lts of A nd ers on and Evans contra- d ict thos e of Mey er and Glau ber. Ku h's s tu d y of time s eries f or ind ivid u al f irms pro- vid es a d irect comparis on of mod els bas ed on s ales and mod els bas ed on cas h f low. The s ales mod els are s u perior in all time s eries comparis ons . Other meas u res of internal f inance employ ed by A nd ers on-s tocks of government s ecu rities , accru ed tax liability , d ebt capacity -are not s ignif icant as d e- terminants of d es ired capital. Res ek's mea- s u re of d ebt capacity is als o not s ignif icant. A mong variables as s ociated with external f inance, the interes t rate appears as a s ig- nif icant d eterminant of d es ired capital in the A nd ers on and Res ek mod els . The interes t rate is barely s ignif icant in the Evans and Mey er-Glau ber mod els . A n ind ex of s tock prices is highly s ignif icant in the Res ek mod el; the rate of change of this ind ex is not s ignif icant in the Mey er-Glau ber mod el. With the exception of the Mey er-Glau ber mod el, variables meas u ring the cos t of ex- ternal f inance play a more important role than variables repres enting internal f inance. External f inance variables are, however, d ef initely s u bord inate to variables as s ociated with ou tpu t. External f inance appears as a s ignif icant d eterminant of d es ired capital only in mod els s u ch as the A nd ers on and Res ek mod els , with ou tpu t a highly s ignif - icant d eterminant. We have alread y obs erved that Gru nf eld 's s tu d y of inves tment by ind ivid u al f irms d oes not inclu d e ou tpu t or capacity u tilization as a pos s ible d eterminant of d es ired capital. In this mod el d es ired capital is proportional to the market valu e of the f irm. A nother mod el s tu d ied by Gru nf eld is equ ivalent in per- f ormance to the market valu e mod el. De- s ired capital d epend s on the interes t rate, the prod u ct of the interes t rate, and the market valu e of the f irm. This prod u ct play s the role of ou tpu t in other mod els of inves t- ment. Ou tpu t, repres ented by the prod u ct of the interes t rate and the market valu e of the f irm, is the mos t s ignif icant d eterminant of d es ired capital; the cos t of external f u nd s , repres ented by the interes t rate, is als o s ig- nif icant bu t d ef initely s u bord inate to ou tpu t. S imilarly , in Eis ner's mod el f or f irm time- s eries , prof its play the role of ou tpu t, and the rate of retu rn meas u res the cos t of ex- ternal f inance. Ou r overall conclu s ion is that where in- ternal f inance variables appear as s ignif icant d eterminants of d es ired capital, they repre- s ent the level of ou tpu t. Where both ou tpu t and cas h f low are inclu d ed as pos s ible d eter- minants , only one is a s ignif icant d eter- minant. The prepond erance of evid ence clearly f avors ou tpu t over cas h f low.7 The s tu d ies by Jorgens on and S iebert of inves tment by ind ivid u al f irms , and by Jorgens on and S tephens on of inves tment by ind u s try grou ps , inclu d e the cos t of external f inance as part of the price of capital s er- vices . In both s tu d ies the cos t of external f inance is meas u red as a weighted average of the rate of retu rn on equ ity and the rate of interes t on d ebt, In the Jorgens on-S iebert s tu d y the rate of retu rn on equ ity is mea- 7This conclu s ion corroborates the res u lts of Ku h [76, 1963, p. 213]. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1134 Jou rnal of Economic Literatu re s u red in two alternative way s -inclu d ing and exclu d ing capital gains on as s ets as part of the retu rn to equ ity . The cos t of external f inance enters the price of capital s ervices along with the price of capital good s , d e- preciation, the rate of growth of the price of inves tment good s , and variables repres enting the tax s tru ctu re. In the Jorgens on-S tephen- s on s tu d y the rate of retu rn on equ ity is meas u red exclu d ing capital gains on as s ets . The f ind ings on the role of internal and ex- ternal f inance we have reviewed d irectly contrad ict the bas ic premis e of the theory of f inance propou nd ed by Mey er and Ku h [86, 1957] and by Du es enberry [22, 1958]. In this theory the cos t of internal f u nd s is below the cos t of external f u nd s . The s ched - u le repres enting the s u pply of f u nd s to the f irm is d is continu ou s at the point where internal f u nd s are exhau s ted . Divid end policy and f inancial s tru ctu re are important d eterminants of the cos t of capital and of inves tment behavior. Interpreting the cas h f low variable in the Mey er-Glau ber mod el as repres enting ou tpu t, which d oes not otherwis e appear as a s ignif icant d e- terminant of d es ired capital, there is no evid ence to s u pport the theory of f inance of Mey er, Ku h, and Du es enberry . De- s ired capital is ind epend ent of cas h f low, hold ings of liqu id as s ets , and d ebt capacity . This evid ence implies that the cos t of capital is ind epend ent of the availability of internal f u nd s . Ind epend ence of the cos t of capital and f inancial policies d etermining d ivid end pay ments and f inancial s tru ctu re is , of cou rs e, the principal conclu s ion of the Mod igliani- Miller theory of f inance [89, 1958; 94, 1959; 91, 1961; 92, 1963; 88, 1963; 90, 1965; 95, 1966; 96, 1967 and 93, 1969]. From the point of view of the Mod igliani- Miller theory of f inance, the repres entation of the cos t of external f inance in mos t eco- nometric s tu d ies of inves tment behavior is s eriou s ly incomplete. Firs t, many economet- ric s tu d ies employ the rate of interes t on d ebt as the cos t of capital. The corporate bond rate is u s ed as a cos t of capital by Evans , Gru nf eld , Hickman, Mey er and Glau ber, and Res ek. A nd ers on u s es the Treas u ry bill rate. The cos t of capital is not equ al to the corporate bond rate s o long as equ ity is inclu d ed in the f inancial s tru ctu re of the f irm. A mong the s tu d ies we have reviewed , only the s tu d ies of ind ivid u al f irms by Eis ner, and by Jorgens on and S iebert, and the s tu d ies of ind u s try grou ps by Jorgens on and S tephens on and by Res ek inclu d e meas u res of the cos t of d ebt and the cos t of equ ity . S econd ly , only Eis ner, Hickman, Jorgens on and S iebert, and Jorgens on and S tephens on have inclu d ed d epreciation with the cos t of capital in the price of capital s ervices . Only meas u res of d epreciation by Hickman, Jor- gens on and S iebert, and Jorgens on-S tephen- s on are cons is tent with the mortality d is .- tribu tion f or inves tment good s that u nd er- lies the corres pond ing meas u res of capital s tock. Only the Jorgens on-S iebert and Jor- gens on-S tephens on meas u res take accou nt of the tax s tru ctu re. The appropriate cos t of capital is a bef ore-tax rate. Eis ner meas u res the rate of retu rn on equ ity af ter taxes . Finally , only the Jorgens on-S iebert meas u re takes accou nt of capital gains . This com- pletes ou r evalu ation of the d eterminants of d es ired capital. 4.3. The time s tru ctu re of the inves tment pro- ces s The time s tru ctu re of the inves tment proces s has been repres ented by f inite, geo- metric, and rational d is tribu ted lag f u nc- tions . Finite d is tribu ted lag f u nctions are employ ed by Eis ner in s tu d y ing ind ivid u al f irms and by Res ek in s tu d y ing ind u s try grou ps . Geometric d is tribu ted lag f u nctions are employ ed withou t mod if ication by Gru n- f eld and Ku h. The geometric d is tribu ted lag s cheme employ ed by Koy ck, with the f irs t weight arbitrary and the remaining weights d eclining geometrically , has been u s ed by Bou rneu f and Eis ner in s tu d y ing inves tment This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1135 by ind u s try grou ps . Hickman has u s ed a s imilar s cheme with the f irs t two weights arbitrary ; a clos ely related d is tribu ted lag f u nction is employ ed by A nd ers on. Jorgen- s on and S iebert and Jorgens on and S tephen- s on employ rational d is tribu ted lag f u nc- tions that inclu d e the geometric d is tribu ted lag f u nctions u s ed by Koy ck and Hickman as s pecial cas es . The characterization of average lags in the inves tment proces s f rom f inite, geo- metric, and rational d is tribu ted lag f u nctions can be compared with extens ive s u rvey s tu d ies of lags between d ecis ions to inves t and the s tart of cons tru ction, and between the s tart of cons tru ction and completion mad e by Thomas May er [83, 1960; 82, 1958 and 84, May er and S onenblu m, 1955]. May er's s u rvey evid ence is bas ed on the s tu d y of new ind u s trial plants and plant ad - d itions in the United S tates s tarted in 1954 and 1955. A qu es tionnaire was s ent to in- d ivid u al companies , requ es ting inf ormation on lags between d rawing of plans , the f inal d ecis ion to bu ild , and the placing of the f irs t s ignif icant ord er to the s tart of cons tru c- tion [83]. Very extens ive s tu d ies of the lag f rom s tart of cons tru ction to completion had been mad e earlier f rom d ata on complete plants f rom the period of the Korean War and World War II; the two s ets of res u lts are very s imilar [83, p. 130 and 84]. A f requ ency d is tribu tion of lags in inves tment projects is given in Table 7. Weighting thes e res u lts by s ize of project, May er obtains average lags f rom the d rawing of plans to s tart of con- s tru ction of s ix months or two qu arters , f rom placing of f irs t s ignif icant ord er to s tart of cons tru ction of two months , and f rom s tart of cons tru ction to completion of 15 months or f ive qu arters [83, p. 128]. A n u nweighted mean f or complete plants f rom s tart of con- s tru ction to completion is 11 months , which coincid es with the es timate of this lag by May er and S onenblu m f rom d ata f or the period of the Korean War [83, p. 132]. The d if f erence between weighted and u nweighted TA BLE 7 DIS TRIBUTION OF LA GS IN COMPLETION OF INVES TMENT PROJECTS Nu m- ber Per- Qu arters of cn of cent Plants Dra.wing of plans 0 8 11 to s tart of con- 1 21 29 s tru ction 2 21 29 3 10 14 4 and over 12 17 Total 72 100 Placing of f irs t 0 42 54 s ignif icant ord er 1 19 25 to s tart of con- 2 12 16 s tru ction 3 and over 4 5 Total 77 100 S tart of con- 2 and u nd er 14 16 s tru ction to com- 3 24 27 pletion 4 33 37 5 5 6 6 6 7 7 and over 8 9 Total 90 100 S ou rce: May er [83, 1960 Table 2, p. 130]. means is explained by a pos itive correlation between time requ ired f or completion and s ize of plant [83, p. 128]. May er obtains a total lag f rom d ecis ion and completion of s even qu arters [83, p. 128].8 Comparing May er's s u rvey res u lts with es timates of average lags f rom f inite d is - tribu ted lag f u nctions , we f ind that Eis ner's d is tribu ted lag f u nctions f or ind ivid u al f irms 8 R. E. Krainer [75, 1968] cond u cted a d etailed s tu d y of 25 projects in the au tomobile ind u s try and f ou nd re- s u lts s imilar to thos e of May er. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1136 Jou rnal of Economic Literatu re red u ce to f u nctions of cu rrent and lagged valu es of prof its and the rate of retu rn. The res u lting average lags are les s than one y ear in length, which is incons is tent with f ind ings f rom s u rvey evid ence. Weights in the d is - tribu ted lag f u nctions of A nd ers on and Res ek are partly d etermined f rom regres s ions of in- ves tment expend itu res on inves tment ap- propriations . The d is tribu ted lag f u nction f rom appropriations to inves tment es timated by A lmon is employ ed with an aid d itional lag of one qu arter as the d is tribu ted lag f rom in- ves tment d ecis ions to actu al expend itu res by Res ek. A nd ers on permits ad d itional lags f rom the d eterminants of d es ired capital to expectations and f rom expectations to ap- propriations . A nd ers on es timates the s u m of thes e lags to be f ou r qu aCrters in length, con- trad icting Res ek's implicit as s u mption that the lag is one qu arter. Ou r conclu s ion is that the f inite d is tribu ted lag f u nctions employ ed by Res ek, like thos e of Eis ner, lead to u nd er- es timates of the average lags u nd erly ing the inves tment proces s . May er's s u rvey res u lts may be compared with Koy ck's es timates of the average lag f rom a geometric d is tribu ted lag f u nction. Koy ck's mod el may be repres ented in the f orm: ln Kt = a ln Yt + (1-a- X) ln Yt-, + X In Kt-1, where Yt is pro(lu ction and Kt is capacity . Within manu f actu ring, Koy ck's es timates of average lags are 10.20 y ears f or cement, 29.94 y ears f or open heartlh blas t f u rnaces , and 5.26 y ears f or petroleu m ref ining.9 It s hou ld be noted that Koy ck's pioneering s tu d y of inves tment was completed bef ore May er's s u rvey res u lts became available. A d etailed analy s is of lag s tru ctu res es - timated f rom mod els clos ely related to Koy ck's has been carried ou t by Ku h in his s tu d y of ind ivid u al f irms [76, 1963]. A l- ternative mod els employ ed by Ku h inclu d e the f irs t d if f erence mod el, A A t = XO-3Kt + ( - X) A Kt, where A t is the level of inves tment, Xt s ales , and 6 the rate of replacement, the levels mod el, A t = X3Xt + (- X)Kt, the lagged mod el, A 1t = XXtlX + (5 -X)Kt and the average mod el, A t = Xf 2l(Xt + Xt_1) + (b - X)Kt. A verage lags f or each mod el es timated f rom time s eries are given in Table 8.1" Ku h's es timates f or time s eries d ata co- incid e rou ghly with Koy ck's es timates ; both s ets of res u lts conf lict s harply withl May er's s u rvey evid ence.11 The conf lict in evid ence implies that the geometric d is tribu ted lag f u nction employ ed by Koy ck and by Ku h is mis -s pecif ied . This argu ment has been f ormalized by Griliches [44, 1967]. If the geometric d is tribu ted lag f u nction is applied where a les s res trictive f orm of d is tribu ted lag f u nction is appropriate, the omitted variables have the ef f ect of bias ing the es - timated averatge lag u pward very s u bs tan- tially [44, pp. 36-38]. Koy ck's f lexible accelerator mod el of in- ves tment behavior has been mod if ied by Hickman to incorporate an ad d itional lagged term in ou tpu t [57, 1965, pp. 32-41]. The mod el employ ed by Hickman is : In Kt = a In Yt + d ln Yt-1 + (1 - a - / - X) ln Yt-2 + X In Kt_1. Hickman f its this mod el to annu al d ata on capital s tock K, and real ou tpu t Yt, d ropping I The average lags are f or d irect es timates u nd er con- s tant retu rns to s cale. The d irect es timates are given by Koy ck [74, 1954, pp. 99, 104, 106]. 10 Es timates of the aver age lags are bas ed on the d e- preciation ad ju s ted capital s tock s lope; the capital s tock s lopes are es timated f romthe "B-regres s ion" res u lts . The annu al d epreciation rate u s ed in this ad ju is tment is .0395 [76, Ku h, 1963, Table 9.1, pp. 294-95, 296]. 11 Koy ck's es timates f or manu f actu ring range f rom 20 to 120 qu arters ; Ku h's es timates range f rom16 to 115 qu arters . May er's es timnate is s even qu arters . This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1137 coef f icients in the d is tribu ted lag f u nction that are not s ignif icant. Es timates of the parameters of Hickman's mod el au d aver- age lags d erived f rom thes e parameters are pres ented in Table 9. The ad d ition of a third term in real ou tpu t is requ ired f or f ive of the 13 ind u s try grou ps analy zed by Hickman. Hickman's es timates of the aver- age lag are mu ch lower than thos e of Koy ck. A ll of Hickman's es timates f or manu f ac- tu ring ind u s tries are below the lowes t of Koy ck's es timate of 5 y ears f or petroleu m ref ining. A lthou gh Hickman's es timates ap- pear to be s omewhat higher than the average lags s u gges ted by May er's s u rvey evid ence, the bias is red u ced very s u bs tantially rela- tive to the es timates of Koy ck and Ku h. Ou r conclu s ion is that the mod if ied geo- metric d is tribu ted lag f u nctions employ ed by Hickman provid e an ad equ ate repre- s entation of the inves tment proces s , bu t that the geometric d is tribu ted lag f u nctions u s ed by Koy ck and Ku h d o not. Mey er and Glau ber employ a lag s cheme with weights alternately zero and d eclining geometrically . This pattern of weights ap- pears to be highly implau s ible. Evans em- ploy s a lag s cheme with geometrically d e- clining weights f or both d epend ent and in- d epend ent variables . The rate at which weights d ecline is the s ame f or both s ets of variables . This pattern of weights als o ap- pears to be implau s ible. To complete ou r evalu ation of alternative characterizations of the time s tru ctu re of the inves tment proces s , we cons id er es timates of average lags f rom rational d is tribu ted lag f u nctions by Jorgens on and S iebert f or an- nu al d ata on inves tment by ind ivid u al f irms and by Jorgens on and S tephens on f or qu ar- terly d ata f or ind u s try grou ps . Jorgens on and S iebert s elect the bes t-f itting lag d is - tribu tion f rom rational d is tribu ted lag f u nc- tions of the f orm: A Kt = -y oA K+t + 'y ,A K+t-l + 72A K+t-3 - wjA Kt_j_ W2A Kt-2y TA BLE 8 A VERA GE LA GS FOR S IXTY MA NUFA CTURING FIRMS , ES TIMA TED BY KUH c. A verage Mod el a. X-& b. X Lag (Years ) Firs t d if f erence . 1638 .2033 3.92 Levels .0010 .0405 23.69 Lagged - .0040 .0355 28.17 A verage .0150 .0545 17.85 S ou rce: Ku h [76, 1963, Table 9.1, pp. 294-95]. where: TO + 71 + 72 = 1 -i- W2. A verage lags es timated f or 1949-63 and f or 1937-41, 1949-63 f or the Neoclas s ical I mod el are given in Table 10 [65, 1968, p. 1145]. Jorgens on and S tephens on s elect the bes t-f itting lag d is tribu tion f rom f u nctions of the f orm: 7 A Kt = E y ,A K+t- - wjA Kt-l- 2A Kt-2- r=2 where: 7 Ey T 1+ Wl + C2. r=2 A verage lags es timated f or the period 1949, f irs t qu arter to 1960, f ou rth qu arter, are given in Table 11 [68, 1967, pp. 21-22]. The res u lts of Jorgens on and S tephens on f or ind u s try grou ps are s imilar to thos e of Hickman; both s ets of es timates are s omewhat higher than May er's s u rvey es timate. The res u lts of Jorgens on and S iebert f or ind i- vid u al f irms vary more wid ely than res u lts f or ind u s try grou ps . On the whole their es - timates of average lags f or ind ivid u al f irms are lower than es timates f or ind u s try grou ps and agree more clos ely with May er's s u rvey res u lts . Ou r overall conclu s ion is that the rational d is tribu ted lag f u nctions employ ed This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1138 Jou rnal of Economic Literatu re TA BLE 9 A VERA GE LA GS FOR THIRTEEN Two-DIGIT INDUS TRIES , U. S . MA NUFA CTURING, ES TIMA TED BY HICKMA N d . A ver- Ind u s try Grou p a. U_ b. / c. I t- age Lag 3-2 (Years ) Primary metals .1297 .2383 .1110 2.05 Machinery .1508 .0975 3.42 Motor vehicles .1132 .1859 2.96 Trans portation equ ipment .2715 .0369 .3232 1.67 S tone, clay , and glas s .1837 .0663 .0012 3.25 Other d u rables .2597 .1224 1.94 Food and beverages .0029 .3343 2.96 Textiles .1577 .1832 .0278 2.36 Paper .1685 .2321 2.08 Chemicals .1317 .3477 .1826 1.59 Petroleu m .1503 .2639 2.05 Ru bber .2085 .2342 1.79 Other nond u rables .0816 .2488 2.78 S ou rce: Hickman [57, 1965, Tables 4 and 5, pp. 54-561. by Hickman and by Jorgens on and S iebert f or annu al d ata and by Jorgens on and S tephens on f or qu arterly d ata provid e s atis f actory repres entations of the time s tru ctu re of the inves tment proces s . In thes e s tu d ies the ty pical s hape of the lag d is tribu tion is f irs t ris ing and then f alling; in the geometric lag d is tribu tion the lag coef f icients are alway s f alling. This may help to accou nt f or the pronou nced d if f erence in empirical res u lts f or s tu d ies bas ed on the geometric d is tribu tion and s tu d ies bas ed on generalizations of this d is tribu tion. This completes ou r evalu ation of alternative repres entations of the time s tru ctu re. 4.4 Replacement inves tment Except f or Evans ' s tu d y of inves tment by ind u s try grou ps , s tu d ies that inclu d e replace- ment inves tment explicitly employ the geo- metric mortality d is tribu tion f or inves tment good s . Eis ner, Gru nf eld , Jorgens on and S iebert, and Ku h employ this d is tribu tion in the s tu d y of inves tment by ind ivid u al f irms . Bou rneu f , Eis ner, Hickman, Jorgens on and S tephens on, and Res ek employ this d is - tribu tion in the s tu d y of inves tment by in- d u s try grou ps . Bou rneu f , like Chenery and Koy ck, employ s capacity as a meas u re of capital s tock. Implicitly , Bou rneu f as s u mes that the capital-capacity ratio is cons tant. The s tu d ies of A nd ers on and Mey er and Glau ber d o not inclu d e replacement inves t- ment. The geometric mortality d is tribu tion im- plies that replacement is proportional to capital s tock. It als o implies that capital s tock is a weighted s u m of pas t gros s inves t- ments with geometrically d eclining weights . TA BLE 10 A VERA GE LA GS FOR FIFTEEN U. S . MA NUFA CTURING FIRMS ES TIMA TED BY JORGENS ON A ND S IEBERT A verage Lag (Years ) Firm 1937-41, 1949-63 1949-63 General Motors 1.01 2.17 Good y ear .32 .63 A merican Can 3.15 2.74 Pitts bu rgh Plate Glas s 1.49 2.06 U. S . S teel 1.61 1.18 General Electric 1.61 1.55 Rey nold s Tobacco 2.12 2.62 Du Pont 1.00 1.00 A nacond a 1.80 1.42 S tand ard Oil, N. J. .83 .50 International Paper .45 1.44 Wes tinghou s e A ir Brake .37 .68 International Bu s ines s Machines .48 .47 S wif t 1.09 1.51 Wes tinghou s e Electric 2.37 2.64 S ou rce: 1949-63: Jorgens on and S iebert, [65, 1968, Table 6, p. 1145]. 1937-41, 1949-63: S iebert, pers onal com- mu nication. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1139 A n internally cons is tent mod el of replace- ment inves tment bas ed on the proportional- ity of replacement and capital s tock requ ires a meas u re of capital s tock that employ s the geometric mortality d is tribu tion [57, Hick- man, 1965; 59, Jorgens on, 1963; 60, Jorgen- s on, 1965]. The s tu d ies of ind u s try grou ps by Eis ner, Hickman, Jorgens on and S tephen- s on, and Res ek and the s tu d y of ind ivid u al f irms by Jorgens on and S iebert are internally cons is tent and employ an appropriate mea- s u re of capital s tock.'2 In the s tu d y of inves tment by ind ivid u al f irms , Eis ner and Ku h as s u me that replace- ment is proportional to gros s capital s tock, an u nweighted s u m of pas t gros s inves tments net of retirements . This as s u mption is in- cons is tent with a geometric mortality d is - tribu tion f or capital good s . Eis ner makes no attempt to revalu e acqu is itions and re- tirements f or changes in the price of ac- qu is ition of inves tment good s . Ku h revalu es both acqu is itions and retirements . Gru nf eld as s u mes that replacement is proportional to net capital s tock, gros s capital s tock les s accu mu lated d epreciation. Both acqu is itions of inves tment good s and d epreciation are revalu ed to correct f or changes in the price of acqu is ition of inves t- ment good s . A ccou nting d epreciation d u ring the period cons id ered by Gru nf eld is bas ed on the s traight line method rather than the d e- clining balance method implied by the geo- metric mortality d is tribu tion f or inves tment good s . Evans ' s tu d y employ s the as s u mption that replacement inves tment is proportional to the average of capital s tock held f ive and s ix qu arters earlier. This as s u mption is not tes ted . Capital s tock is meas u red as net capital s tock, which is incons is tent with the mortality d is tribu tion f or inves tment good s employ ed in Evans ' mod el of replacement inves tment. Net capital s tock in each period TA BLE 11 A VERA GE LA GS FOR FIFTEEN Two-DIGIT INDUS TRIES , U. S . MA NUFA CTURING, ES TIMA TED BY JORGENS ON A ND S TEPHENS ON A verage Lag Ind u s try Grou p (Years ) Primary metals 2.27 Primary nonf errou s metals 2.06 Electrical machinery 1.76 Non-electrical machinery 1.77 Motor vehicles 2.68 Nonau tomotive 2.20 S tone, clay , and glas s 1.95 Other d u rables 1.69 Food and beverages 2.19 Textiles 2.06 Paper 2.82 Chemicals 1.77 Petroleu m 1.93 Ru bber 1.50 Other nond u rables 1.50 S ou rce: Jorgens on and S tephens on [68, 1967; Table 2, pp. 21-22]. is d ef lated by the inves tment good s price ind ex. Evans , like Eis ner, d oes not attempt to correct acqu is itions of inves tment good s f or pas t changes in the price of acqu is ition. A lthou gh the geometric mortality d is tribu - tion is commonly employ ed in the es timation of replacement requ irements , relatively little d irect evid ence is available on the valid ity of this d is tribu tion. Mey er and Ku h have s tu d ied the "echo ef f ect" in analy zing d ata f or ind ivid u al f irms [86, 1957, pp. 91-100]. A n extreme f orm of the "echo ef f ect" is as - s ociated with a period ic mortality d is tribu - tion, res u lting in a period ic d is tribu tion of replacements and period ic cy cles of replace- ment inves tment [39, Feller, 1957, pp. 290- 93]. A weaker f orm of the echo ef f ect is as s o- ciated with relatively high valu es of the re- 12 Eis ner and Res ek u s e the capital s tock d ata of Jorgens on and S tephens on. Hickman employ s his own es timates . This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1140 Jou rnal of Economic Literatu re placement d is tribu tion at particu lar ages . This is the f orm of the echo ef f ect tes ted by Mey er and Ku h. The age of a f irm's capital equ ipment is meas u red by accu mu lated d e- preciation res erves d ivid ed by gros s f ixed as - s ets at the beginning of the period . Firms are d ivid ed into 15 ind u s try grou ps within manu - f actu ring, corres pond ing rou ghly to two- d igit ind u s tries [86, 1957, pp. 9209-392]. The d epend ent variable is gros s inves tment d i- vid ed by gros s f ixed as s ets on the grou nd s ". . . that s ince replacement inves tment is inclu d ed in gros s inves tment the net impact of the echo ef f ect s hou ld be as certainable even when u s ing gros s inves tment as the d e- pend ent variable-althou gh perhaps not as precis ely as wou ld be d es irable" [86, p. 93]. Mey er and Ku h employ a prof it mod el and a s ales mod el to explain gros s inves tment. In regres s ions f or averages of annu al d ata over the period 1946-50, the age variable is s ig- nif icant in both mod els f or only one ind u s try grou p-Vehicles and S u ppliers ; age is s ig- nif icantly negative f or this ind u s try , s u g- ges ting high rates of replacement f or low ages of capital good s [86, pp. 9255-56]. For other ind u s try grou ps the age variable is both pos itive and negative with s mall nega- tive valu es pred ominating. A ge is s ignif - icantly negative f or Light Chemicals in the s ales mod el bu t not in the prof its mod el. The proportion of s ignif icant res u lts -3 ou t of 30 regres s ions -is not ou t of line with the nu ll hy pothes is that the echo ef f ect play s no role in the d etermination of inves tment f or ind ivid u al f irms . M. S . Feld s tein and D. K. Foot have at- tempted to cons tru ct a mod el of replacement inves tment bas ed on es timates of replace. ment inves tment f rom the McGraw-Hill S u rvey and es timates of capital s tock f rom the Department of Commerce [38, 1971]. The capital s tock es timates imply s eparate es timates of replacement inves tment, s o the two bod ies of d ata employ ed by Feld s tein and Foot are mu tu ally incons is tent. They as s u me that replacement as a proportion of gros s capital s tock d epend s on variables s u ch as cas h f low and capacity u tilization. The hy pothes is that the replacement rate d e- pend s on cas h f low or capacity u tilization is incons is tent with the perpetu al inventory method u s ed by the Department of Com- merce in es timating capital s tock. Feld s tein and Foot attempt to tes t the hy pothes is that the replacement rate is con- s tant. This hy pothes is wou ld be tru e only if the replacement rate is calcu lated as the ratio of replacement inves tment to capital s tock, and only if capital s tock is es timated by the d eclining balance method . Und er thes e circu ms tances the tes t propos ed by Feld s tein and Foot is s u perf lu ou s s ince the average replacement rate is cons tant by d ef inition. We conclu d e that Feld s tein and Foot have not s u cces s f u lly avoid ed the neces s ity f or d irect obs ervation of both re- placement inves tment and capital s tock in a tes t of the mod el of replacement they pro- pos e. Perpetu al inventory es timates of cap- ital s tock s u ch as the es timates of the De- partment of Commerce cannot be employ ed in s u ch a tes t. A n alternative approach to the empirical s tu d y of mortality d is tribu tions is throu gh the analy s is of u s ed equ ipment prices . Data on u s ed equ ipment prices are limited to read ily movable as s ets . A s tu d y of price d ata f or f arm tractors is reported by Griliches [43, 1960] and s tu d ies of price d ata f or au to- mobiles are pres ented by P. Cagan [12, 1965] and F. Wy kof f [107,1970]. A mu ch more in- tens ive s tu d y of price d ata f or pick-u p tru cks is given by Hall [50, 1971]. Us ed equ ipment prices , like prices f or acqu is ition of new equ ipment, are equ al to the s u m of f u tu re rental prices weighted by the relative ef f iciency of the capital good over its remain- ing lif etime. For geometric d ecline in ef f i- ciency the acqu is ition prices d ecline geomet- rically with age. We now review the evi- d ence on d ecline in relative ef f iciency f rom d ata on u s ed equ ipment prices . S tu d ies of prices of acqu is ition of new and This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1141 u s ed capital good s reveal a s harp d rop be- tween the price of new equ ipment and the price of u s ed equ ipment. The obviou s ex- planation is that prices of new equ ipment are "lis t" prices paid by relatively f ew pu r- chas ers . The actu al prices paid vary over a mod el y ear, d eclining as a new mod el y ear approaches ; this variation is omitted f rom the obs erved lis t prices . The prices of u s ed equ ipment are bas ed on actu al trans actions and vary over the y ear [43, 1960, p. 198]. From an examination of prices of u s ed f arm tractors , ages one to 13, f or ten d if f erent points of time d u ring the y ears 1937-58, Griliches conclu d es : "The d ata point to a d e- clining balance [geometric] d epreciation mod el, with a rate s omewhat higher in the 1930's than in the 1950's " [43, p. 198]. Wy kof f 's f ind ings f or u s ed au tomobiles , ages one to s even, f or f ive d if f erent points of time d u ring the y ears 1950-68, are s imilar [107, 1970, pp. 171-792]: "A f ter the f irs t y ear cars d o appear to d ecay exponentially [geometri- cally ] ." Cagan als o f ind s that geometric d e- preciation provid es a s atis f actory approxi- mation [12, 1965, pp. 92925-926]. Hall s tu d ied d ata f or s econd -hand pick-u p tru cks , ages one to s ix, f or the y ears 1961-67. He conclu d es [50, 1971] that: ". . . the geo- metric [mortality d is tribu tion] f u nction is probably a reas onable approximation f or many pu rpos es . Certainly , there are no grou nd s f or believing that any very s eriou s error has been comitted by u s ing a geometric d eterioration f u nction in calcu lating capital s tock." We conclu d e that Hall's s tu d y of the mortality d is tribu tion f or pick-u p tru cks s u pports the conclu s ions of Cagan, Griliches , and Wy kof f f or au tomobiles and f arm trac- tors . The geometric mortality d is tribu tion explains the behavior of u s ed equ ipment prices f or all three ty pes of capital good s . The empirical evid ence f rom s tu d ies of equ ipment prices s u pports the f ind ings of Mey er and Ku h f rom an analy s is of replace- ment requ irements . This completes ou r eval- u ation of mod els of replacement inves tment. 4.5. Conclu s ion The point of d epartu re f or the large bod y of empirical res earch on inves tment behavior d u ring the pas t d ecad e has been the f lexible accelerator mod el of Chenery and Koy ck. This mod el has been grad u ally mod if ied and extend ed u nd er the impact of new empirical f ind ings , bu t its bas ic ou tlines have f ou nd s u bs tantial empirical s u pport. Des ired cap- ital is d etermined by long-ru n cons id era- tions ; changes in d es ired capital are trans - lated into inves tment expend itu res by a d is - tribu ted lag f u nction. This mod el provid es an explanation of net inves tment in all of the empirical s tu d ies we have reviewed . A lternative mod els of inves tment behavior d if f er s u bs tantially in the d eterminants of d es ired capital. The empirical evid ence now available provid es a means of d is criminating among competing hy pothes es on the bas is of their perf ormance. Firs t, real ou tpu t emerges as the mos t important s ingle d eterminant of inves tment expend itu res . Cons id ered as a competing mod el of inves tment, the prof its or liqu id ity mod el of Tinbergen and Klein is d ef initely inf erior. A s econd important d e- terminant of inves tment is the availability of f inance. The introd u ction of f inancial con- s id erations with variations in ou tpu t neces - s itates s u bs tantial mod if ication of the f lexible accelerator mod el of Chenery and Koy ck. Financial cons id erations can be introd u ced into a mod el of inves tment expend itu res in two f orms : internal f u nd s or liqu id ity and external f u nd s or the cos t of capital. Thes e two alternative f ormu lations are as s ociated with the theories of f inance of Du es enberry and Mey er and Ku h and of Mod igliani and Miller, res pectively . The evid ence clearly f avors the Mod igliani-Miller theory . Internal liqu id ity is not an important d eterminant of inves tment, given the level of ou tpu t and the cos t of external f u nd s . A s econd extens ion of the f lexible accelera- tor mod el neces s itated by empirical evid ence is the incorporation of replacement requ ire- ments . A mod el of replacement inves tment This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions 1142 Jou rnal of Economic Literatu re bas ed on the geometric mortality d is tribu - tion is u s ed in all empirical s tu d ies that in- corporate replacement explicitly . This mod el has important implications f or the meas u re- ment of capital s tock and the as s ociated rental price. Capital s tock is meas u red in a way that is incons is tent with the geometric mortality d is tribu tion in many of the s tu d ies of inves tment we have reviewed . The d u rable good s mod el is characterized by price-qu antity d u ality . This d u ality pro- vid es a means of integrating f inancial and real d eterminants of d es ired capital into a mod el of prod u cer behavior. The implica- tions of the d u rable good s mod el f or meas u re- ment of the price of capital s ervices have been d eveloped only recently . In all bu t a f ew s tu d ies we have reviewed , the cos t of capital s ervices is meas u red in a way that f ails to ref lect the u nd erly ing d u rable good s mod el. The price s id e of the d u rable good s mod el has been extend ed recently to in- corporate d etails of the tax s tru ctu re, pro- vid ing a d irect link between economic policy and the d eterminants of inves tment ex- pend itu res [7a, 1971, pp. 15, 51-53]. Given the valid ity of the mod el f or d u rable capital good s that u nd erlies aggregate cap- ital s tock, a s u bs id iary problem is the valid - ity of the geometric mortality d is tribu tion. Direct tes ts of the corres pond ing mod els of replacement requ irements and capital good s prices s u pport the geometric d is tribu tion. A tes t of the valid ity of the d u rable-good s mod el its elf wou ld requ ire a well d ef ined alternative theory of replacement that d oes not employ an aggregate meas u re of capital. A corres pond ing theory of the cos t of the u s e of d u rable equ ipment wou ld als o be requ ired . Chenery and Koy ck employ ed the geo- metric d is tribu ted lag f u nction in repres ent- ing the time s tru ctu re of the inves tment proces s . The empirical evid ence we have re- viewed s u gges ts that the res u lting es timates of average lags are bias ed u pward very s u b- s tantially . Rational d is tribu ted lag f u nc- tions employ ed by A nd ers on, Hickman, Jor- gens on and S iebert, and Jorgens on and S tephens on prod u ce es timates of the average lags cons is tent with s u rvey evid ence on the lag s tru ctu re; f or manu f actu ring, the average lag between the d eterminants of inves tment and actu al expend itu res is f rom one and a half to two y ears . The average lag varies among ind u s tries and among f irms and , of cou rs e, among projects within a f irm. In the s tu d y of inves tment behavior the mos t important cu rrent problem is the in- tegration of the time s tru ctu re of the inves t- ment proces s into the repres entation of technology . Mod els retaining the d u rable good s mod el of capital and au gmenting the prod u ction f u nction with internal ad ju s t- ment cos ts have been propos ed by Lu cas [81, 1967], Uzawa [106, 1969], and Tread - way [105, 1969]. Thes e mod els of technology may be approximated by d is tribu ted lag in- ves tment f u nctions . A n important s econd ary problem is the time s tru ctu re of f inancial d e- terminants of inves tment; Bis chof f [7a] has s u gges ted that real ou tpu t and the cos t of capital s hou ld have s eparate lag s tru ctu res in the d etermination of inves tment expen- d itu res . A t a more bas ic level the mos t important open qu es tion in the s tu d y of inves tment is the integration of u ncertainty into the theory and econometrics of inves tment. The Mod ig- liani-Miller theory of f inance u nd erlving recent s tu d ies of inves tment alread y incorpo- rates s ome as pects of u ncertainty . A more thorou ghgoing integration wou ld requ ire the s imu ltaneou s d etermination of prod u ction, i nves tment, f inancial policy , and s ecu rity prices . This ambitiou s goal appears to be well within the range of exis ting economic theory and econometric techniqu e. In the pas t d ecad e the econometric s tu d y of inves tment behavior has d eveloped f rom empirical comparis ons of alternative d eter- minants to increas ingly explicit theories of prod u cer behavior. Inves tment res earch has been an important area f or the d evelopment and tes ting of new mod els of prod u ction and This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:37:44 PM All use subject to JSTOR Terms and Conditions Jorgens on: Economic S tu d ies of Inves tment Behavior 1143 f inance. 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