Delivery Lags and the Demand for Investment

Abstract

The literature on the theory of investment has expanded greatly in recent years. One problem that has captured the attention of much of this literature is that of establishing a theoretical basis for the investment demand function of a firm. As Haavelmo [7] pointed out, the static neo-classical theory of the firm, while it implies a demand for capital, does not generally yield a finite demand for investment. To resolve this problem, many authors3 have built costs of adjustment into the firm's optimization process in order to account for the delay that buyers of capital goods experience in adjusting their capital stock. Although such costs are certainly important in explaining determinate rates of investment, other kinds of adjustment delays also appear in capital goods markets. Specifically, delivery lagsthe period of time between the placement of an order for a capital good and its subsequent delivery-are also a salient feature of capital goods markets. Yet, the implications for the demand for investment of the presence of delivery lags remain relatively unexplored.4 A great deal of the empirical literature on investment focuses on investigating the determinants of investment expenditures. But the presence of delivery lags implies that time5 has elapsed between the decision to invest, or the demand for investment, which in turn takes expression in (say) the placement of an order for a capital good, and the expenditure to which that decision ultimately gives rise, since typically investment expenditures are made when the capital good is delivered. Hence, if one is fundamentally interested in the determinants of investment demand, it is essential that this timing distinction be coped with in specifying empirical models. Even when delivery lags are recognized in empirical work, however, they are introduced into the model after the theory is completed and thus their effect on investment demand is essentially ignored. The typical procedure' is to provide a theoretical argument to specify the determinants of the investment decision. It is then usually assumed that it takes time for the investment decision to be brought to completion with the delivery of the capital good at which time the actual expenditure takes place. But, the fact that