Lumpy investments and capital adjustment patterns in the food manufacturing industry

Abstract

This paper investigates investment patterns and the types of capital adjustment cost in the U.S. food manufacturing plants. The study first documents the lumpy nature of investment rates and shows that few investment incidents at plant-level contribute to a large portion of aggregate investment, indicating the importance of large investments in the food manufacturing industry. Further, the paper presents econometric evidence for the nature of capital adjustment costs by estimating an investment hazard model which determines both the probability of having an investment spike and the factors affecting lumpy investments. The results support the presence of both convex and non-convex components of capital adjustment costs. While the importance of lumpy investments at the plant-level support for a non-convex component of adjustment cost, the empirical estimation of hazard function shows downward-sloping shape (i.e., negative duration dependence) which demonstrates the existence of a convex component as well.