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Licensed Unlicensed Requires Authentication Published by De Gruyter October 24, 2005

Adjustment Costs and Irreversibility as Determinants of Investment: Evidence from African Manufacturing

Arne Bigsten, Paul Collier, Stefan Dercon, Marcel Fafchamps, Bernard Gauthier, Jan Willem Gunning, Remco Oostendorp, Catherine Pattillo, Måns Söderbom and Francis Teal

In this paper we investigate if the predictions of three different models of capital adjustment costs are consistent with the observed investment patterns among manufacturing firms in five African countries. We document a high frequency of zero investment episodes, which is consistent with both fixed adjustment costs and irreversibility and inconsistent with quadratic adjustment costs. We model the decision to invest using a dynamic discrete choice model and find evidence of irreversibility and not fixed costs. We finally model the investment rate as a function of the size of the capital disequilibrium. The results confirm that irreversibility is an important factor affecting the investment behaviour of African manufacturing firms. Some implications of this finding are discussed.

Published Online: 2005-10-24

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