Resource title

The irreversibility premium

Resource image

image for OpenScout resource :: The irreversibility premium

Resource description

When investment is irreversible, theory suggests that firms will be reluctant to invest. This reluctance creates a wedge between the discount rate guiding investment decisions and the standard Jorgensonian user cost (adjusted for risk). We use the intertemporal tradeoff between the benefits and costs of changing the capital stock to estimate this wedge, which we label the irreversibility premium. Estimates are based on panel data for the period 1980-2001. The large dataset allows us to estimate the effects of limited resale markets, low depreciation rates, high uncertainty, and negative industry-wide shocks on the irreversibility premium. Our estimates provide a readily interpretable measure of the importance of irreversibility and document that the irreversibility premium is both economically and statistically significant.

Resource author

Robert S. Chirinko, Huntley Schaller

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/26310

Resource license

Adapt according to the presented license agreement and reference the original author.