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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

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

Arne Bigsten1 / Paul Collier2 / Stefan Dercon3 / Marcel Fafchamps4 / Bernard Gauthier5 / Jan Willem Gunning6 / Remco Oostendorp7 / Catherine Pattillo8 / Måns Söderbom9 / Francis Teal10

1Göteborg University

2Oxford University

3Oxford University

4Oxford University

5HEC Montréal

6Free University, Amsterdam

7Free University, Amsterdam


9Oxford University

10Oxford University

Citation Information: Contributions in Economic Analysis & Policy. Volume 4, Issue 1, ISSN (Online) 1538-0645, DOI: https://doi.org/10.2202/1538-0645.1228, October 2005

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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.

Keywords: investment; adjustment costs; irreversibility; hazard function; African manufacturing

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