American Economic Association

Econometric Studies of Investment Behavior: A Survey
Author(s): Dale W. Jorgenson
Source: Journal of Economic Literature, Vol. 9, No. 4 (Dec., 1971), pp. 1111-1147
Published by: American Economic Association
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Econometric S tu d ies of Inves tment
Behavior: A S u rvey
By
DA LE W. JORGENS ON
Harvard Univers ity
I wvis h to expres s my gratitu d e to Charles W.
Bis chof f , Zvi Griliches , and
Bert G. Hickman f or very d etailed and helpf u l comments on this paper.
They are not, of cou rs e, res pons ible f or any remaining errors or d ef i-
ciencies .
1. Introd u ction
IN THIS PA PER the read er will f ind a review
of econometric s tu d ies of inves tment in
f ixed capital. A review of thes e s tu d ies
throu gh 1953 was given in 1957 by J. Mey er
and E. Ku h [86], and a d etailed review
throu gh 1960 was pres ented by R. Eis ner
and R. H. S trotz in 1963 [36]. In this review
we concentrate on recent res earch on time
s eries of inves tment expend itu res f or ind i-
vid u al f irms and ind u s tries . Ou r point
of d epartu re is the f lexible accelerator mod el
of inves tment originated by H. B. Chenery
[13, 1952] and L. M. Koy ck [74, 1954]. In
this mod el attention is f ocu s ed on the time
s tru ctu re of the inves tment proces s . The d e-
s ired level of capital is d etermined by long-
ru n cons id erations . Changes in d es ired capi-
tal are trans f ormed into actu al inves tment
expend itu res by a geometric d is tribu ted lag
f u inction-the s pecif ication of d es ired capital
has been the s u bject of a wid e variety of
alternative theories ; the alternative theories
d o agree on the valid ity of the f lexible ac-
celerator mechanis m.
Denoting the actu al level of capital by K
and the d es ired level by K+, capital is ad -
ju s ted toward its d es ired level by a cons tant
proportion of the d if f erence between d es ired
and actu al capital,
(1) Kt -Kt
=
[1 -
X][K+t- Kt- .
A lternatively , actu al capital may be repre-
s ented as a weighted average of all pas t levels
of d es ired capital,
00
(2) Kt
=
[1 -X]
E
XTK+tT,
Tr=O
with geometrically d eclining weights . We
ref er to the latter f orm of the f lexible ac-
celerator as a d is tribu ted lag f u nction relat-
ing the actu al level of capital to pas t d es ired
levels of capital. The f lexible accelerator
mod el was originally propou nd ed as an
alternative to the accelerator mod el of J. M.
Clark [14, 1917]. In the accelerator mod el,
the ad ju s tment coef f icient 1-X is taken to
be u nity , s o that actu al capital is equ al to
d es ired capital, and net inves tment is pro-
portional to the change in d es ired capital,
Kt -Kt-,
=
K+t
-
K+t-,.
In Clark's accelerator mod el d es ired capital
is proportional to ou tpu t. The accelerator
mod el with ad ju s tment coef f icient 1-X
equ al to u nity was rejected in tes ts by S .
Ku znets , J. Tinbergen, H. B. Chenery , L. M.
Koy ck, and B. Hickman [78, Ku znets , 1935;
103, Tinbergen, 1938; 13, Chenery , 1952; 74,
Koy ck, 1954 and 56, Hickman, 1957].
A s econd alternative to Clark's accelera-
tor mod el is that inves tment d epend s on the
level of prof its ; this theory of inves tment was
f irs t propos ed by Tinbergen [103, 1938 and
104, 1939] and s u bs equ ently d eveloped by
Klein [70, 1950 and 71, 1951]. Two alterna-
tive rationalizations of this theory have
been of f ered . Firs t, Tinbergen argu es [104]
that realized prof its meas u re expected pro-
f its : "It is almos t a tau tology to s ay that
inves tment is governed by prof its expecta-
lll
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1112 Jou rnal of Economic Literatu re
tions ." S econd ly , the rate of inves tment may
be cons trained by the s u pply of f u nd s . In the
s trong vers ion of this theory the f inancial
cons traint operates at all times (the cos t of
f u nd s s ched u le becomes highly inelas tic
where internal f u nd s are exhau s ted ). In a
weaker vers ion of the theory the f inancial
cons traint operates at low rates of capacity
u tilization, while extreme pres s u re on capac-
itv may res u lt in the u s e of ou ts id e s ou rces of
f inance [86, Mey er and Ku h, 1957, pp. 190-
208; 3, A nd ers on, 1964; 85, Mey er and
Glau ber, 1964; 76, Ku h, 1963 and 22,
Du es enberry , 1958]. Within the f ramework
provid ed by the f lexible accelerator mod el all
three d eterminants of inves tment-ou tpu t,
internal f u nd s , and the cos t of external
f inance-may be inclu d ed as d eterminants of
the d es ired level of capital.
The f lexible accelerator mechanis m may be
trans f ormed into a complete theory of in-
ves tment behavior by ad d ing a s pecif ication
of the d es ired level of capital and a mod el of
replacement inves tment. By accou nting
d ef inition, the change in capital f rom period
to period is equ al to gros s inves tment les s
replacement inves tment. The f lexible ac-
celerator provid es an explanation of change
in capital, bu t not of gros s inves tment. The
choice of a mod el of replacement is impor-
tant s ince replacement inves tment pre-
d ominates in total inves tment expend itu res ,
at leas t at the aggregate level [77, Ku znets ,
1961 ].1 The geometric mortality d is tribu tion
has been wid ely ad opted f or empirical work;
f or this d is tribu tion replacement is propor-
tional to actu al capital s tock [57, Hickman,
1965; 59, Jorgens on, 1963 and 60, Jorgens on,
1965
].
Und er this as s u mption the change in
capital s tock may be written:
(3) Kt- Kt- =
A t-
bKt-ly
where A is gros s inves tment and
5
is the rate
of replacement, a f ixed cons tant. Combining
the geometric mod el of replacement with the
f lexible accelerator mod el of net inves tment,
we obtain a mod el of inves tment expend i-
tu res :
(4) A t
=
[l-
X][K+t
-Kt-1] + WKt-1.
In this mod el the ad ju s tment coef f icient
f or replacement inves tment is equ al to u nity .
The s peed of ad ju s tment f or gros s inves t-
ment is mu ch more rapid than the s peed of
ad ju s tment f or net inves tment.
A lternative econometric mod els of in-
ves tment behavior d if f er in the d eterminants
of the d es ired level of capital, in character-
ization of the time s tru ctu re of the inves t-
ment proces s , and in treatment of replace-
ment inves tment. In the f lexible accelerator
mod el of Chenery and Koy ck, d es ired capital
is proportional to ou tpu t, cls in the rigid ac-
celerator of Clark. In alternative mod els of
inves tment behavior, d es ired capital d epend s
on capacity u tilization, internal f u nd s , the
cos t of external f inance, and other variables .
In reviewing alternative mod els of inves t-
ment behavior ou r f irs t objective is to d e-
s cribe and evalu ate the s election of the
d eterminants of the d es ired level of capital
in each of the s tu d ies u nd er review.
In the f lexible accelerator mod el of Chenery
and Koy ck, the time s tru ctu re of the inves t-
ment proces s is characterized by a geometric
d is tribu ted lag f u nction. A ctu al capital is a
d is tribu ted lag f u nction of d es ired capital
with geometrically d eclining weights . This
characterization has been mod if ied by Chen-
ery s o that d es ired capital is proportional to
lagged ou tpu t; the bes t f itting lag may be
d etermined by comparing d if f erent lags with
regard to good nes s of f it. Koy ck has mod i-
f ied the geometric d is tribu ted lag f u nction
s o that the f irs t weight may be d etermined
as a s eparate parameter with s u cces s ive
weights d eclining geometrically ,
Kt
=
aK+t + [1 -a] [l
-
XI
E XrK+ti.
T=0
The geometric d is tribu ted lag f u nction may
be extend ed by allowing ad d itional weights
1
Capital cons u mption has d ominated gros s capital
f ormation f or the economy as a whole s ince 1919.
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1113
to be d etermined as s eparate parameters or
by making d es ired capital a f u nction of the
lagged valu es of its d eterminants . In review-
ing mod els of inves tment behavior ou r s ec-
ond objective is to d es cribe and evalu ate
alternative repres entations of the time s tru c-
tu re of the u nd erly ing inves tment proces s .
Finally , -mod els of inves tment behavior
d if f er in their treatment of replacement in-
ves tment. If replacement is proportional to
capital s tock, the u nd erly ing mortality d is -
tribu tion f or inves tment good s is geometric.
Change in capital s tock is equ al to gros s in-
ves tment les s a cons tant proportion of capital
s tock, s o that capital s tock is a weighted s u m
of pas t gros s inves tments with geometrically
d eclining weights ,
00
Kt = , (1
-6)A t_,T
r=-O
A n internally cons is tent mod el of replace-
ment inves tment bas ed on proportionality
between replacement inves tment and capital
s tock requ ires a meas u re of capital s tock
bas ed on the geometric mortality d is tri-
bu tion. Fu rthermore, d u ality between ac-
qu is ition of inves tment good s and the time
rental valu e of capital requ ires the incor-
poration of d epreciation into the cos t of
capital. Ou r f inal objective in reviewing
alternative mod els of inves tment behavior is
to d es cribe and evalu ate the treatment of
replacement inves tment.
2: Inves tment by Ind ivid u al Firm8
2.1. Introd u ction
The f irs t part of this review is d evoted
to s tu d ies of inves tment behavior by ind i-
vid u al U.S . manu f actu ring f irms . We f ocu s
attention on s tu d ies of time s eries on in-
ves tment expend itu res ; time s eries analy s is
requ ires a d etailed repres entation of the time
s tru ctu re of the inves tment proces s . Thes e
res u lts can be compared d irectly with res u lts
f rom s tu d ies of ind u s try grou ps . Time s eries
s tu d ies of inves tment by ind ivid u al f irms
have been completed by Eis ner [30, 1967],
Y. Gru nf eld [49, 1960], Jorgens on and C. D.
S iebert [65, 1968 and 64, 1968], and Ku h
[76, 1963]. Cros s s ection s tu d ies have been
carried ou t by P. J. Dhry mes and M. Ku rz
[20, 1967], J. J. Diamond [21,
196J2],
Eis ner
[26, 1960; 29, 1962; 27, 1963; 25, 1964 and
30, 1967], Ku b [76, 1963], Mey er and
Glau ber [85, 1964, Chapters 2, 3, 5 and 6],
and Mu eller [97, 1967].
2.2. Ku h's capital s tock growth
Ku h's s tu d y of time s eries on inves tment
by ind ivid u al f irms compares two mod els of
inves tment behavior. The f irs t is clos ely re-
lated to the f lexible accelerator mod el of
Chenery and Koy ck with d es ired capital
proportional to s ales . The s econd is analo-
gou s to the f lexible accelerator with d es ired
capital proportional to prof its . A third mod el
with d es ired capital a f u nction of both s ales
and prof its is inclu d ed in the comparis ons .
Ku h's principal conclu s ions [76, 1963, p.
213] are bas ed on comparis ons of the alter-
native mod els : "S ince the major objective is
to improve u nd ers tand ing of d y namic time
s eries behavior, it s hou ld be pointed ou t that
no matter how the contras ts are d rawn f rom
time s eries , the acceleration s ales mod el is
s u perior to the internal f u nd f low, prof it
mod el."
In f ormu lating the prof its mod el Ku h
points ou t [76, p. 208] that " . . . the expec-
tational hvpothes is f or prof its cannot, and
perhaps s hou ld not, be d is tingu is hed f rom
the s ales level or capacity accelerator hy poth-
es is . The main cand id ate variable f or the
expectational hy pothes is is s imply net in-
come af ter tax, a s econd ary cand id ate being
gros s operating prof it. Both variables will
have s trong correlations with the level of
s ales ." The alternative rationale f or the
prof its theory of inves tment is that the rate
of inves tment is cons trained by the s u pply of
f u nd s . The bas ic premis e of this vers ion of
the prof its theory is that the s u pply of f u nd s
s ched u le ris es s harply at the point where
internal f u nd s are exhau s ted . Ku h employ s
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1114 Jou rnal of Economic Literatu re
retained earnings plu s d epreciation as a mea-
s u re of prof its ; his res u lts s u gges t that s ales
rather than internal f u nd s d etermine the
level of d es ired capital.
Ku h's vers ion of the f lexible accelerator
treats d es ired capital as proportional to
s ales (or prof its ), lagged s ales , or an average
of s ales and lagged s ales . The weights as s oci-
ated with d es ired capital d ecline geometri-
cally [76, pp. 7-16]. Within Ku h's s tu id y ,
es timates f rom time s eries and cros s s ections
conf lict. Es timates f rom a f irs t d if f erence
mod el are d is s imilar f rom the corres pond ing
res u lts f or other treatments of the time s tru c-
tu re.2 Thes e res u lts s u gges t that the geo-
metric d is tribu ted lag f u nction employ ed by
Ku h res u lts in a mis -s pecif ication of the time
s tru ctu re of the inves tment proces s .
In Ku h's mod el f or gros s inves tment re-
placement inves tment is proportional to
capital s tock [76, p. 9296]. The implied mor-
tality d is tribu tion f or inves tment good s ,
inclu d ing retirements and the d ecline in
ef f iciency of exis ting capital good s , is geo-
metric. Ku h meas u res capital s tock as
cu mu lated gros s inves tment les s retirements ,
each d ef lated by an appropriate inves tment
good s price ind ex [76, pp. 64-74]. Decline in
ef f iciency of exis ting capital good s is ignored
in meas u ring capital s tock, which is incon-
s is tent with Ku h's treatment of replacement
inves tment.
2.3. Gru nf eld 's s tu d y of corporate inves tment
A n alternative attack on the u s e of prof its
as a d eterminant of d es ired capital has been
mad e by Y. Gru nf eld . He incorporates lagged
prof its into a f lexible accelerator mod el and
f ind s [49, Gru nf eld , 1960, p. 219] that the
partial correlation of prof its and inves tment,
given capital s tock, is ins ignif icant: "Ou r re-
s u lts d o not conf irm the hy pothes is that
prof its are a good meas u re of thos e expected
prof its that will tend to ind u ce inves tment
expend itu res . The obs erved s imple correla-
tion between inves tment and prof its s eems
to be d u e to the f act that prof its are ju s t
another meas u re of the capital s tock of the
f irm...." S imilar res u lts are obtained f or
the s tock of liqu id as s ets and the cu rrent
level of prof its .
Gru nf eld s u gges ts that d is cou nted f u tu re
earnings les s the cos ts of f u tu re ad d itions to
capital provid e a better meas u re of expected
prof its than cu rrent realized prof its . In
Gru nf eld 's theory d es ired capital is propor-
tional to the valu e of the f irm's ou ts tand ing
s ecu rities . Gru nf eld ju s tif ies this theory on
the grou nd s that s tock market participants
have as mu ch inf ormation abou t f u tu re earn-
ings as the managers of f irms . In ad d ition,
participants in the s tock market have s trong
economic incentives to make accu rate f ore-
cas ts of f u tu re earnings . The partial correla-
tion of the valu e of the f irm and inves tment,
given capital s tock, is s ignif icant [49, p. 233 ].
Mu ltiply ing the valu e of the f irm by the
corporate bond rate to meas u re expected
prof its , Gru nf eld f ind s that "The over-all
power of the valu e of the f irm to explain in-
ves tment s eems to be nearly id entical to the
combined powers of the expectations vari-
able and the rate of interes t" [49, p. 241].
The repres entation of the time s tru ctu re
of the inves tment proces s employ ed by
Gru nf eld is id entical to that of Ku h.3 Gru n-
f eld , like Ku h, as s u mes that replacement in-
ves tment is proportional to capital s tock or
that the mortality d is tribu tion f or inves t-
ment good s is geometric. He meas u res capital
as cu mu lated gros s inves tment les s d eprecia-
tion, each d ef lated by an appropriate inves t-
ment good s price ind ex. The initial level of
capital is s et equ al to zero in 1935. A ccou nt-
ing d epreciation throu ghou t the period of
Gru nf eld 's s tu d y , 1935-1954, is bas ed on the
s traight-line method , which is incons is tent
with a geometric mortality d is tribu tion f or
inves tment good s [49, pp. 217-18]. Nonethe-
les s , Gru nf eld 's meas u rement of capital
s tock is an improvement over Ku h's s ince
d ef lated accou nting d epreciation provid es a
2
S ee below, s ection 4.3.
3
S ee above, s ection 2.2.
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1115
better approximation to replacement re-
qu irements than d ef lated retirements .
2.4. Eis ner's permanent
income theory f or inves tment
The f irs t permanent income mod el of in-
ves tment cons id ered by Eis ner employ s the
ratio of inves tment to gros s f ixed as s ets as
an ind epend ent variable and the rate of
growth of s ales , the ratio of prof its to gros s
f ixed as s ets , and the ratio of d epreciation to
gros s f ixed as s ets f or a s ingle y ear as ind e-
pend ent variables . The d epreciation variable
is cons tant acros s time s eries obs ervations
f or a given f irm and may be regard ed as the
cons tant term in the time s eries regres s ion
f or each f irm. Unlike Gru nf eld and Ku b,
Eis ner impos es the as s u mption that param-
eters other than the cons tant term in the
regres s ion are the s ame f or all f irms . Prof its
and the rate of growth of s ales are both s ig-
nif icant d eterminants of d es ired capital in
the f irm time s eries regres s ions f or the period
1955-62 [30, 1967, p. 374]. The proportion
of the f irm time s eries variance explained by
Eis ner's mod el f or this period is .055.
Eis ner cons id ers an alternative mod el of
inves tment f or ind ivid u al f irms f or the pe-
riod 1960-62. This alternative mod el inclu d es
two ad d itional ind epend ent variables repre-
s enting the market valu e of the f irm intro-
d u ced by Gru nf eld and the rate of retu rn. To
be more precis e, the ad d itional ind epend ent
variables are the ratio of the market valu e
of the f irm to net worth plu s d epreciation re-
s erve plu s bond ed ind ebted nes s , and the
ratio of prof its af ter taxes plu s d epreciation
plu s interes t to the market valu e of the f irm.
The res u lts f or f irm time-s eries change d ra-
matically with the ad d ition of thes e two vari-
ables . Only prof its and the rate of retu rn ap-
pear as s ignif icant d eterminants of d es ired
capital. Des ired capital is pos itively related
to prof its and negatively related to the rate
of retu rn [30, p. 378].
Eis ner's res u lts f or the period 1960-62
d irectly contrad ict his res u lts f or the period
1955-62, bas ed on a les s complete mod el,
incorporating all of the s ame variables (ex-
cept f or market valu e of the f irm and the
rate of retu rn). The res u lts f or the period
1960-62 als o contrad ict the mod el u nd erly -
ing Eis ner's extens ive earlier analy s is of
inves tment by ind ivid u al f irms . The earlier
analy s is is bas ed on mod els incorporating
change in s ales as the principal d eterminant
of inves tment behavior [20, 1967; 21, 1962;
26, 1960; 29, 1962; 27, 1963; 25, 1964 and 30,
1967]. Upon empirical tes ting, Eis ner's
mod el f or the period 1960-62 ef f ectively re-
d u ces to the mod el propos ed by Gru nf eld .
The prof its variables repres ent prof it ex-
pectations ; the rate of retu rn repres ents the
cos t of external f inance. In Gru nf eld 's mod el
prof it expectations are repres ented by the
prod u ct of the valu e of the f irm and the
corporate bond rate; the cos t of external
f inance is repres ented by the corporate bond
rate. The prod u ct of Eis ner's rate of retu rn
and the valu e of the f irm is prof its af ter
taxes plu s d epreciation plu s interes t. Prof its
af ter taxes are a s ignif icant explanatory vari-
able in Eis ner's mod el.
Eis ner's d is tribu ted lag f u nction cons is ts
of a f inite weighted average of pas t rates of
growth of s ales , prof its , rates of retu rn, and
market valu es of the f irm. A lthou gh s even
lagged terms in the rate of growth of s ales
are inclu d ed in the regres s ions , only two
lagged terms in each of the other variables
are inclu d ed . In ef f ect, inves tment is a
weighted average of cu rrent and lagged
valu es of prof its and the rate of retu rn [30,
1967, p. 378]. Replacement inves tment is
treated as proportional to gros s capital s tock;
no attempt is mad e to correct book valu es of
gros s capital s tock f or variations in the ac-
qu is ition cos t of inves tment good s [30, pp.
370-71]. The u s e of gros s capital s tock is
incons is tent with the geometric mortality
d is tribu tion f or inves tment good s as s u med
by Eis ner.
This review of Eis ner's permanent income
mod el of inves tment is limited to f irm time
s eries res u lts . Only thes e res u lts are com-
parable to thos e f or the other s tu d ies of
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1116 Jou rnal of Economic Literatu re
f irm behavior inclu d ed in this review. Eis ner
pres ents regres s ions f or cros s s ections of
f irms and f or ind u s try time s eries and cros s
s ections . His own analy s is of the res u lts at-
tempts to relate d if f erences in es timates of
the f actors af f ecting inves tment "to d if f ering
permanent and trans itory components in the
relevant variances and covariances [30, 1967,
p. 386
1."
A d etailed s u mmary of this analy s is
is pres ented by Eis ner in his 1967 work [30,
pp. 386-87].
2.5. Jorgens on and S iebert;'s
theory of optimal capital accu mu lation
Jorgens on and S iebert cons id ered two
mod els of corporate inves tment behavior
bas ed on an optimal time path f or capital
accu mu lation. Optimal accu mu lation implies
a theory of the rate of retu rn; this theory has
been d eveloped by Mod igliani and Miller
[89, 1958; 94, 1959; 91, 1961; 92, 1963; 88,
1963; 90, 1965; 95, 1966; 96, 1967 and 93,
19691. In the Mod igliani-Miller theory the
cos t of capital is s hown to be ind epend ent of
the f inancial s tru ctu re of the f irm or of
d ivid end policy ; this view contras ts s harply
with the theory of the cos t of capital u nd er-
ly ing the liqu id ity theory of inves tment be-
havior. In the liqu id ity theory the s u pply
s ched u le is horizontal u p to the point at
which internal f u nd s are exhau s ted and ver-
tical at that point.
In the Mod igliani-Miller theory the ap-
propriate cos t of capital f or inves tment d e-
cis ions is a weighted average of the expected
retu rn to equ ity and the retu rn to d ebt. The
retu rn to equ ity is meas u red in two alterna-
tive way s : f irs t, capital gains on as s ets held
by the f irm may be regard ed as trans itory ,
s o that retu rn to equ ity is meas u red exclu d -
ing capital gains . S econd , capital gains on
as s ets may be regard ed as part of the retu rn
to inves tment s o that retu rn to equ ity in-
clu d es capital gains . The f irs t mod el s tu d ied
by Jorgens on and S iebert, ref erred to as
Neoclas s ical I, inclu d es capital gains . The
s econd mod el, ref erred to as Neoclas s ical II,
exclu d es capital gains [65, 1968, p.
1130].
In both mod els cons id ered by Jorgens on
and S iebert, d es ired capital is proportional to
the ratio of the valu e of ou tpu t to the price
of capital s ervices . The price of capital
s ervices d epend s on the price of inves tment
good s , the rate of retu rn, the rate of d epre-
ciation, the rate of growth of the price of
inves tment good s , and the tax s tru ctu re. The
objective of the f irm is to maximize its mar-
ket valu e; maximization of market valu e is
implied by maximization of prof it at every
point of time, where prof it is d ef ined as net
revenu e on cu rrent accou nt les s the rental
valu e of capital s ervices .
The vers ion of the f lexible accelerator em-
ploy ed by Jorgens on and S iebert treats net
inves tment as a d is tribu ted lag f u nction of
changes in d es ired capital. The weights
as s ociated with changes in d es ired capital
are approximated by the weights in a ra-
tional d is tribu ted lag f u nction [65, 1968, p.
11281. This clas s of d is tribu ted lag f u nctions
inclu d es the geometric d is tribu ted lag f u nc-
tion and generalizations of it propos ed by
Koy ck as s pecial cas es . Jorgens on and
S iebert choos e the bes t-f itting rational d is -
tribu ted lag f u nction f or each mod el of in-
ves tment they cons id er.
In the Jorgens on-S iebert mod els f or gros s
inves tment, replacement is proportional to
capital s tock, s o the implied mortality d is -
tribu tion f or capital good s is geometric.
Capital s tock is meas u red by a perpetu al
inventory method with d eclining balance re-
placement. Gros s inves tment in cons tant
prices is interpolated between initial and
terminal es timates of net capital s tock f rom
balance s heet d ata [65, 1968, p. 1129]. For
the geometric mortality d is tribu tion, the rate
of replacement is equ al to the rate of d e-
preciation; this -common rate is -employ ed in
es timating capital s tock and in meas u ring
the price of capital s ervices .
Jorgens on and S iebert f ind that a mod el
of optimal capital accu mu lation, incorporat-
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1117
ing capital gains on as s ets held by the f irm,
perf orms bes t [65, pp. 1142-43 and 64,
1968]. They have als o compared the per-
f ormance of mod els bas ed on optimal capital
accu mu lation with corres pond ing mod els
bas ed on the acceleration principle-like
thos e employ ed by Ku h and Eis ner, internal
liqu id ity , like thos e employ ed by Gru nf eld
and Ku h, and expected prof its , employ ed by
Gru nf eld and Eis ner. The overall ranking
f or pos twar d ata is :
1. Neoclas s ical I.
2. Neoclas s ical II.
3. Expected Prof its .
4. A ccelerator.
5. Liqu id ity .
This ranking corres pond s with that of Ku h
f or the A ccelerator and Liqu id ity mod els ,
with Gru nf eld f or Expected Prof its and
Liqu id ity mod els , and with Eis ner f or Ex-
pected Prof its and A ccelerator mod els .
3. Inves tment by Ind u s try Grou ps
3.1. Introd u ction
The s econd part of ou r review is d evoted
to s tu d ies of inves tment behavior by ind u s -
try grou ps within A merican manu f actu ring.
In reviewing thes e s tu d ies we concentrate on
econometric mod els of inves tment behavior
f or two-d igit ind u s tries within U.S . manu -
f actu ring. Res u lts cons is tent acros s ind u s -
tries are d if f icu lt to achieve by cons id eration
of a wid e range of alternative s pecif ications
and s election of the bes t f itting among them.
S tu d ies of qu arterly d ata on inves tment by
ind u s try grou ps f rom the OBE-S EC S u rvey
have been mad e by A nd ers on [3, 1964],
Eis ner [29, 1962 and 31, 1965], Evans [37,
1967], Jorgens on and S tephens on [67, 1967;
68, 1967 and 66,
1969], Mey er and Glau ber
[85, 1964, Chapters 4 and
7],
and Res ek [98,
1966]. S tu d ies of annu al d ata have been
mad e by Bou rneu f [10, 1964] and Hickman
[57, 1965]. S tu d ies of annu al or qu arterly
d ata f or aggregates s u ch as total manu -
f actu ring have been mad e by A nd ers on [2,
1967, pp. 413-25], Bis chof f [9, 1969; 8, 1970
and 41, 1971, pp. 61-130], Coen [16, 1968;
17, 1969 and 15, 1971], d e Leeu w [79, 1962],
Ecks tein [24, 1965], Eis ner [32, 1969; 28,
1969 and 33, 1970], Eis ner and Nad iri [34,
1968 and 35, 1968], Greenberg [42, 1964],
Griliches and Wallace [48,
1965],
Hall and
Jorgens on [51, 1967; 52, 1969 and 53, 1971],
Hammer [54, 1964], Jorgens on [59, 1963
and 60,
1965],
Klein and Tau bman [73,
1971], Lintner [80, 1967], S chramm [100,
1970], and Thu row [102, 1969]. S tu d ies of
cros s s ections of ind u s tries have been mad e
by G. J. S tigler [101, 1963].
In as s es s ing the d eterminants of the
d es ired level of capital in s tu d ies of inves t-
ment by ind ivid u al ind u s try grou ps , we d i-
vid e the s tu d ies into two categories . In the
f irs t grou p of s tu d ies , A nd ers on, Bou rneu f ,
Evans , Mey er and Glau ber and Res ek, each
d eterminant enters the regres s ion f u nction
d etermining inves tment expend itu res as a
s ingle variable. To apprais e the res u lts we
can tes t each of the propos ed d eterminants
f or s ignif icance. Where s everal d eterminants
enter the regres s ion f u nction, this apprais al
requ ires s imu ltaneou s hy pothes is tes ting. A n
appropriate techniqu e f or this pu rpos e is
S chef f e's S -method . In this method critical
regions f or each of the hy pothes es are s et
s imu ltaneou s ly s o as to control the overall
level of s ignif icance at a pred etermined level.
This method is d is cu s s ed in d etail by
S chef f e [99, 1959] and compared with the
alternative and incorrect method of apply ing
ord inary critical regions f or each ind ivid u al
hy pothes is when s everal hy pothes es are
tes ted s imu ltaneou s ly . In the s econd grou p
of s tu d ies -thos e of Eis ner, Hickman, and
Jorgens on and S tephens on-s ome d etermi-
nants of inves tment expend itu res enter the
regres s ion f u nction as a nu mber of s eparate
variables , repres enting d if f erent lagged val-
u es of the s ame variable. S chef f e's S -method
can not be u s ed to apprais e the overall
s ignif icance of all of the lagged valu es of
each variable. For this pu rpos e a d irect
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1118 Jou rnal of Economic Literatu re
comparis on of the perf ormance of alternative
mod els is u s ef u l.
3.2. A nd ers on's corporate
f inance and f ixed inves tment
We f irs t cons id er W. H. L. A nd ers on's
mod el of inves tment behavior. The rationale
f or A nd ers on's mod el has been d eveloped by
Du es enberry . Du es enberry 's theory of in-
ves tment is characterized by A nd ers on as
... a res tatement of the neoclas s ical pos ition that
inves tment is d etermined by the inters ection of the
marginal ef f iciency s ched u le with the marginal cos t of
f u nd s s ched u le. The marginal ef f iciency s ched u le,
Du es enberry argu es , s hif ts abou t primarily in res pons e
to changes in the rate of u tilization of exis ting capacity .
The marginal cos t of f u nd s s ched u le s hif ts abou t in
res pons e to changes in the d egree of f inancial ris k as
well as to changes in the market cos t of f u nd s [3, 1964,
p.
;7].
The d eterminants of d es ired capital in
A nd ers on's mod el inclu d e three relatively
s tand ard elements -pres s u re on capacity ,
prof its , and interes t rates -and three novel
ones -s tocks of government s ecu rities held
at the beginning of the period , accru ed tax
liability at the end of the period , and long-
term d ebt capacity [3, pp. 70-71]. Pres s u re
on capacity is meas u red by the d if f erence be-
tween actu al s ales and previou s maximu m
s ales , taken as a meas u re of prod u ctive
capacity . Long-term d ebt capacity is d ef ined
as the d if f erence between 18 percent of total
as s ets and ou ts tand ing long-term d ebt at the
beginning of the period . Debt capacity repre-
s ents the availability of u nu s ed borrowing
ability , whereas government s ecu rities and
tax liability repres ent available liqu id ity and
the need f or liqu id as s ets . A nd ers on omits
replacement inves tment f rom his mod el al-
together.
A nd ers on d ivid es the time s tru ctu re of the
inves tment proces s into three components .
One part is a lag between changes in the
d eterminants of inves tment behavior and
changes in the expectations abou t thes e vari-
ables . A lternatively , expectations may be
d etermined by a trend plu s s ome cons tant
proportion of the d eviation of the actu al
variable f rom trend [3, pp.
62-63].
This is
the expectations mechanis m u s ed in the
analy s is of inves tment by two-d igit ind u s try
grou ps . The s econd part of the time s tru ctu re
is a lag f rom a change in the expected valu es
of d eterminants of d es ired capital to the
actu al d ecis ion to inves t. A nd ers on id enti-
f ies the f inal d ecis ion with the appropriation
of f u nd s [3, pp. 65-69
]
and treats the d e-
cis ion lag as a f ixed parameter to be es ti-
mated f rom the d ata. Finally , there is a lag
f rom the inves tment d ecis ion to actu al ex-
pend itu res , that is , f rom appropriations to
actu al inves tment.
A nd ers on d etermines the lag f rom appro-
priations to expend itu res empirically f rom
d ata on appropriations and inves tment. The
f itted lag d is tribu tion as s igns equ al weights
to appropriations lagged one throu gh f ou r
period s , s o that the average lag is two and a
half qu arters [3, p. 68]. A s a cons equ ence of
this empirical f ind ing, A nd ers on repres ents
the u nd erly ing d eterminants of inves tment
as moving f ou r-qu arter averages of qu arterly
d ata. For two-d igit ind u s tries , "In all cas es
bu t three, the bes t d ecis ion lag s eemed to be
three qu arters , the lag which [als o] y ield ed
the bes t res u lts f or aggregate manu f actu ring"
[3, p. 113]. For the total inves tment proces s ,
a three-qu arter d ecis ion lag implies a lag of
f ive and a half qu arters plu s the lag f rom
actu al to expected valu es of the d eterminants
of d es ired capital.
For a more f ormal vers ion of A nd ers on's
mod el, inclu d ing his s pecif ication of the
d eterminants of inves tment and of the time
s tru ctu re of the inves tment proces s , let in-
ves tment in cu rrent prices be qA tA t where
qA t is the price of inves tment good s and A t
the qu antity of inves tment expend itu res ; the
mod el takes the f orm:
qA tA t
= 30 + Olt + /2(S - S inax)t-3
+ f 3REDt-3 + f 4G#t3
(5) + f l5Tat-3 + 06KDL,t-3
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1119
+ 37 t-3 + l8Q1 + 39Q2
+ loQ3 + Ct.
In this mod el a bar over a variable
(-)
ind i-
cates a moving average f or f ou r qu arters
beginning with the qu arter ind icated (e.g.,
t-3) and extend ing backward . The variable
t is a time trend , S - S max corres pond s to
pres s u re on capacity , where S is s ales and
S max is its previou s maximu m valu e, RED is
gros s retained prof its , the s u m of retained
earnings and d epreciation expens e, and i' is
the Treas u ry bill y ield . The time trend is
introd u ced to accou nt f or d if f erence between
actu al and expected valu es of the d etermi-
nants of inves tment expend itu res . The other
three variables repres ent the ef f ects of capac-
ity u tilization, prof it, and the interes t rate.
The variable G is the s tock of government
s ecu rities held at the beginning of the period ,
Ta is accru ed tax liability at the end of the
period , and KDL is long-term d ebt capacity .
Thes e variables repres ent the ef f ects of the
need f or liqu id ity and the ris kines s of bor-
rowing. The variables
Ql,
Q2, and Q3 are
s eas onal d u mmy variables equ al to one in
the corres pond ing qu arter and zero other-
wis e.
To apprais e A nd ers on's empirical f ind ings
[3, 1964, pp. 108-16] we can tes t each of the
propos ed d eterminants of inves tment expen-
d itu res f or s ignif icance by means of S chef f e's
S -method . The res u lts are given in Table 1.
Thes e res u lts s u gges t that the explanatory
variables may be d ivid ed into three grou ps .
Capacity u tilization S -S max and the interes t
rate i' are clearly s ignif icant d eterminants of
inves tment. The capacity u tilization variable
is s ignif icantly d if f erent f rom zero in 5 of
13 ind u s tries ; this variable has an incorrect
s ign f or only one ind u s try grou p. The in-
teres t rate is s ignif icantly d if f erent f rom zero
in 6 of 13 ind u s tries ; this variable has the
wrong s ign f or three ind u s try grou ps . The
s econd s et of explanatory variables -d ebt
capacity KDL, government s ecu rities G, and
tax liability Ta-inclu d es variables that are
TA BLE 1
S IGNIFICA NCE OF DETERMINA NTS OF INVES TMENT
EXPENDITURES , A NDERS ON MODEL, THIRTEEN
INDUS TRY GROUPS , 19491-19581V
(F.05;6,29= 92.43, S =
8.8)
S ignif icant Ins ignif icant
Deter- Coef f ictents Coef f icients
minant
Right Wrong Right Wrong
S ign S ign S ign S ign
S -S max 5 7 1
RED 1 7 5
G 8 6 4
Ta 2 9 2
KDL
8 1 7 2
it 6 4 3
S ou rce: A nd ers on [8, 1964, pp. 108-16].
barely s ignif icant as d eterminants of in-
ves tment. Debt capacity is s ignif icant f or
f ou r ind u s try grou ps , bu t has the wrong s ign
f or one of thes e grou ps . Government s ecu r-
ities is s ignif icant f or three ind u s try grou ps ,
not s ignif icant with the right s ign f or s ix, and
not s ignif icant with the wrong s ign f or f ou r.
Tax liability is s ignif icant f or only two in-
d u s try grou ps . None of thes e res u lts is ou t
of line with the nu ll hy pothes is that the cor-
res pond ing coef f icients are equ al to zero.
Internal f u nd s RED is clearly ins ignif icant
as a d eterminant of inves tment d ecis ions ; it
has the wrong s ign f or 6 of the 13 ind u s try
grou ps and is s ignif icantly d if f erent f rom zero
f or one of thes e grou ps .
3.3. Mey er and Glau ber's
accelerator-res id u al f u nd s mod el
The d eterminants of inves tment expend i-
tu res in the mod el employ ed by Mey er and
Glau ber f or analy zing d ata on inves tment by
ind u s try grou ps inclu d e capacity u tilization,
prof its , interes t rates , and the percentage
change in the price of common s tocks [85,
1964, pp. 139-54]. Pres s u re on capacity is
meas u red by the ratio of the Fed eral Res erve
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Jou rnal
of
Economic Literatu re
Board
(FRB)
ind ex of ind u s trial
prod u ction
to the McGraw-Hill
capacity s eries ,
inter-
polated
f rom annu al benchmarks
u s ing
the
OBE-S EC s eries on inves tment in the manu -
f actu ring
s ector. The
prof its
variable is es s en-
tially
the s ame as that
employ ed by
A nd er-
s on, prof its
af ter taxes minu s d ivid end s
plu s
d epreciation expens e.
The interes t rate is
Mood y 's
A A A ind u s trial bond rate rather
than the
Treas u ry
bill rate
employ ed by
A nd ers on
[85, p. 46].
The theoretical bas is
of the mod el is s imilar to that
propos ed by
A nd ers on and
Du es enberry .
The cos t of
f u nd s s ched u le is as s u med to
d epend
on the
availability
of internal
f u nd s ,
as well as on
the cos t of external f inance as ref lected in
the bond
rate,
and the
percentage
rate of
change
of s tock
prices . Mey er
and
Glau ber,
like
A nd ers on,
omit
replacement
inves tment
f rom their mod el.
Mey er
and Glau ber u s e a
geometric lag
to
d es cribe the time s tru ctu re of the inves tment
proces s
as a whole. For each
ind epend ent
variable a
s eparate
f ixed
lag
is
d etermined ;
f or
example, prof its
are
lagged
one
qu arter,
whereas the bond rate is
lagged
three
qu ar-
ters . The total
average lag
f or the variables
lagged
one
qu arter-prof its , capacity
u til-
ization,
and s tock
prices -is
es timated at 8.7
qu arters
f or total
manu f actu ring.
The aver-
age lag
f or the interes t
rate, lagged
three
qu arters ,
is 10.7
qu arters [85, p. 153]. Be-
cau s e of the choice of two
qu arters ,
rather
than one
qu arter,
as the
lag
f or inves tment
expend itu res
as a
d epend ent variable,
the
s hape
of the
lag
d is tribu tion is rather
pecu -
liar.
Change
in
prof its , capacity u tilization,
or s tock
prices
has no
impact
f or one
qu arter.
The
impact
in the s econd
qu arter
is .207 of
the
long-ru n
ef f ect of the d eterminants of
inves tment on the actu al level of
expend i-
tu res . There is then a
one-qu arter gap
with
no
impact,
f ollowed
by
an
impact
of
.164,
and s o
on,
with zero ef f ects and
geometrically
d eclining
ef f ects f or alternate
qu arters .
Mey er
and Glau ber characterize each two-
d igit ind u s try
of
manu f actu ring by
this
ty pe
of
lag
d is tribu tion.
A f ormal vers ion of the
Mey er-Glau ber
mod el,
where
A t
repres ents
inves tment in
cons tant
prices ,
is :
(6)
A t
=
B,o + /31(T
-
V)t-1 + '2CMt_-
/A S P\
+- 3rt-3 +
04
S Pt-l
+ s 5A t-2 + o6Q1 + /7Q2
+ s 8Q3 + Et.
The variable T-V is net
prof it plu s d epre-
ciation
expens e
les s d ivid end s ; it
corres pond s
to A nd ers on's RED. The variable CM is the
ratio of
prod u ction
to
capacity ,
where
pro-
d u ction is meas u red
by
the FRB ind ex of
ind u s trial
prod u ction
and
capacity by
the
McGraw-Hill
capacity
ind ex. The variable r
is
Mood y 's corporate
bond
rate;
S P is
S tand ard and Poor's ind ex of the
prices
of
425
ind u s trials ;
A S P/S P is the
percentage
rate of
change
of this
price
ind ex. The vari-
ables
Q1, Q2, and
Q3
are s eas onal
d u mmy
variables ,
as in A nd ers on's mod el.
To
apprais e
the
empirical f ind ings
of
Mey er
and
Glau ber,
it wou ld be d es irable to
employ
the s ame
proced u re
as f or A nd ers on's
mod el,
namely ,
to tes t each of the
propos ed
d eter-
minants of inves tment f or
s ignif icance by
means of S chef f e's S -method .
Unf ortu nately ,
Mey er
and Glau ber d o not
report
s tand ard
errors f or their f itted
regres s ion
coef f icients
[85,
1964, pp.
155 and
157].
However, they
d o
report
coef f icients that have the
wrong
s ign
and coef f icients that have the
right s ign
and are
s tatis tically s ignif icant by
"conven-
tional" t-tes ts at one-tailed levels of
s ignif i-
cance of .05 and .01. Thes e levels of
s ignif i-
cance
are,
of
cou rs e, inappropriate
where
more than one coef f icient in a
regres s ion
is
tes ted f or
s ignif icance [99, 1959, p. 80].
The
level of
s ignif icance
of the tes t criterion f or
the S -method
corres pond ing
to
Mey er
and
Glau ber's "conventional" one-tailed level of
s ignif icance
of .01 is
greater
than .10. The
res u lts are tabu lated in Table 2. The nu mber
of
s ignif icant
coef f icients of the
right s ign is ,
of
cou rs e,
over-s tated relative to the nu m-
ber
pres ented
f or the A nd ers on mod el in
1120
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1121
TA BLE 2
S IGNIFICA NCE OF DETERMINA NTS OF
INVES TMENT EXPENDITURES , MEYER-
GLA UBER MODEL, THIRTEEN
INDUS TRY GROUPS , 19501-19581V
(F>.10;4,27= 1.92,
S =
2.8)
Coef f icient Right S ign
Determinant
Coef f icient
S ignif - Ins iglif - Wrong
icant icant S ign
T-V 7 5 1
CM
3 7 3
r 3 8 2
A S P/S P 1 8 4
S ou rce: Mey er and Glau ber [85, 1964,
Tables VII-5 and VII-6, pp. 155 and 157].
Table 1. Nevertheles s , a nu mber of conclu -
s ions s tand ou t. Net prof its plu s d epreciation
les s d ivid end s T -
V is the only clearly s ig-
nif icant d eterminant of inves tment inclu d ed
in the Mey er-Glau ber mod el. Capacity
u tilization CM and the interes t rate r are
barely s ignif icant. The change in s tock prices
A S P/S P is clearly ins ignif icant. Thes e res u lts
are d iametrically oppos ed to the res u lts of
A nd ers on.
3.4. Res ek's s tu d y of inves tment
A third econometric mod el of inves tment
expend itu res bas ed on Du es enberry 's theory
of inves tment is that of Robert Res ek. In
the Res ek mod el the d eterminants of inves t-
ment expend itu res inclu d e ou tpu t, change in
ou tpu t, the rate of interes t, a meas u re of
d ebt capacity , and an ind ex of s tock prices
[98, 1966, p. 325]. The d epend ent variable
is gros s inves tment, d ef lated by a price ind ex
f or inves tment good s and d ivid ed by capital
s tock. Ou tpu t and change in ou tpu t are d i-
vid ed by capital s tock, bu t the other d eter-
minants of inves tment enter the regres s ion
d irectly . Replacement inves tment is as s u med
to be proportional to capital s tock, s o the
rate of replacement is incorporated into the
cons tant term in the regres s ion. Capital s tock
is meas u red by the d eclining balance method
s o Res ek's treatment of replacement is in-
ternally cons is tent [98, p. 327]. The d ebt
capacity variable d epend s on the ratio of
d ebt les s retained earnings to the as s ets of
the f irm [98, pp. 323-24]. This variable pro-
vid es an alternative meas u re of d ebt capacity
to that employ ed by A nd ers on. Retained
earnings enter the d etermination of d ebt
capacity bu t are not inclu d ed as a s eparate
variable.
Res ek employ s a f ixed lag d is tribu tion f or
all variables entering the mod el of inves t-
ment behavior [98, pp. 325-27]. The weights
in this lag d is tribu tion are taken d irectly f rom
a regres s ion of inves tment expend itu res
on capital appropriations f itted by A lmon [1,
1965]. This treatment of the lag s tru ctu re is
s imilar to A nd ers on's , bu t A nd ers on inclu d es
s eparate lags f rom the d eterminants of d e-
s ired capital to inves tment d ecis ions , f rom
d ecis ions to capital appropriations , and f rom
appropriations to actu al expend itu res .
A nd ers on f ind s that the expectations lag is
one qu arter and that a d ecis ion lag of three
qu arters provid es the bes t f itting inves tment
f u nction. The average lag f rom appropria-
tions to inves tment expend itu res is two and
a half qu arters f or all ind u s tries in A nd ers on's
s tu d y . The average lag f rom appropriations
to inves tment expend itu res generally f alls
between two and a half and three qu arters
in A lmon's s tu d y ; the weights are d eter-
mined s eparately f or each ind u s try [1, A lmon
and 98, Res ek, p. 329 ]. Res ek employ s
A lmon's weights with all variables lagged
one qu arter; in ef f ect, he as s u mes that ex-
pectations and d ecis ion lags are one qu arter.
This as s u mption is d irectly contrad icted by
A nd ers on's res u lts , imply ing that Res ek's
characterization of the time s tru ctu re of the
inves tment proces s is invalid .
Res ek pres ents three alternative mod els
f or d etermination of inves tment expend i-
tu res ; a f ormal vers ion of the bes t-f itting
mod el is :
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1122 Jou rnal of Economic Literatu re
A t
-
= /0 + i1Q1 + #2Q2 + #3Q3
Kt
+
(A O) L,
+
6rL,t
1
+ #6
D-F
A 1
-
A
L,t
+ 37S PL,t + Et.
In this mod el the s u bs cript L ref ers to a
moving average of the corres poind ing vari-
able with A lmon weights . The variable A O is
change in ou tpu t over f ou r qu arters , where
ou tpu t i-s meas u red as the FRB ind ex of
ind u s trial prod u ction. The variable r is the
interes t rate, meas u red by Mood y 's A A A
ind u s trial bond rate as in the Mey er-Glau ber
mod el. The variable (D-F)/A is d ebt ca-
pacity , meas u red f rom the FTC -S EC
Qu arterly Financial Report and M is a con-
s tant. The variable S P is the S EC s tock
price ind ex f or the ind u s try [98, p.
332].
The
variables
Ql, Q2 and Q3 are s eas onal d u mmy
variables as in the A nd ers on and Mey er-
Glau ber mod els .
To apprais e Res ek's empirical f ind ings we
employ the s ame proced u re as f or A nd er-
s on's mod el. The res u lts are given in Table 3.
The interes t rate r and s tock price S P are
clearly s ignif icant d eterminants of inves t-
ment expend itu res . Change in ou tpu t A O is
s omewhat les s s ignif icant bu t the nu ll hy -
pothes is that the corres pond ing coef f icients
are all equ al to zero is clearly rejected . The
d ebt capacity variable is s ignif icant with the
wrong s ign in two ind u s tries and s ignif icant
with the right s ign in f ou r ind u s tries . This
variable is of marginal s ignif icance in the
explanation of inves tment behavior. In gen-
eral, Res ek's res u lts appear to corroborate
A nd ers on's f ind ings rather than thos e of
Mey er and Glau ber. Debt capacity has little
or no role to play in explaining inves tment
behavior. The rate of interes t and the price
of corporate s ecu rities , as s ociated with the
cos ts of external f u nd s , are s ignif icant d eter-
TA BLE 3
S IGNIFICA NCE OF DETERMINA NTS OF INVES TMENT
EXPENDITURES , RES EK MODEL, THIRTEEN
INDUS TRY GROUPS , 1953I-19621V
(F.05; 4,32
=
2.67, S 8.83)
S ignif icant Ins ignif icant
Deter- Coef f icients Coef f icients
minant
Right Wrong Right Wrong
S ign S ign S ign S ign
A O/K 5 7 1
r 8 4 1
1
D-F 4 2 5 2
M
-
A
S P 8 3 2
S ou rce: Res ek [98, 1966, Table 4, p. 8382].
minants of inves tment behavior. Change in
ou tpu t play s an important role in d etermin-
ing the level of inves tment.
3.5. Evans ' s tu d y of inves tment
A f ou rth s tu d y of inves tment behavior
bas ed on Du es enberry 's theory of inves tment
is that of M. K. Evans . The d eterminants of
inves tment in the Evans mod el inclu d e ca-
pacity u tilization, capital s tock, s ales , cas h
f low, and the interes t rate [37, 1967, pp.
153-55]. Capacity u tilization is meas u red as
the Wharton S chool capacity ind ex; this
ind ex is calcu lated f rom the FRB ind ex of
ind u s trial prod u ction, as f ollows :
... the method involves marking of f cy clical peaks f or
each of thirty component ind exes of the Fed eral Res erve
Board 's Ind ex of Ind u s trial Prod u ction and then f itting
linear s egments between s u cces s ive peaks . Between the
pres ent time period and the las t es tablis hed peak, the
previou s line s egment is extrapolated at its es tablis hed
s lope u nles s the ind ex in the pres ent period exceed s the
extrapolated trend line. In this cas e a new s lope is com-
pu ted by f itting a new linear line s egment f romthe las t
cy clical peak to the pres ent valu e of the ind ex [72,
Klein and Pres ton, 1967, p. 34].
This proced u re is s imilar to that involved in
compu ting A nd ers on's S -S max variable, ex-
cept that capacity is extrapolated linearly
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1123
f rom previou s peak ou tpu t rather than s et
equ al to s ales at the previou s peak. Cas h
f low is meas u red as prof its af ter taxes plu s
d epreciation les s d ivid end s , which is id enti-
cal to the cas h f low variable employ ed by
Mey er and Glau ber. The interes t rate is
Mood y 's A A A bond rate. Cas h f low is d e-
f lated by the inves tment good s price ind ex.
S ales are d ef lated by the wholes ale price
ind ex exclu d ing f arm commod ities .
Evans as s u mes that replacement is propor-
tional to the average of capital s tock lagged
f ive and s ix qu arters [37, 1967, p. 153]. This
as s u mption implies that the d ecline in ef f i-
ciency of inves tment good s is zero u ntil f ive
qu arters have elaps ed and that relative
ef f iciency is 1-6/2 in the f if th qu arter,
1-6 in the s ixth qu arter, 1-36/2 in the
s eventh qu arter, and s o on. No ju s tif ication
f or this relative ef f iciency f u nction is of f ered
by Evans . Capital s tock is meas u red by d e-
f lating net f ixed as s ets by a price ind ex of
inves tment good s . No ef f ort is mad e to cor-
rect book valu es of gros s f ixed as s ets or
accu mu lated d epreciation allowances f or
variations in the cos t of acqu is ition of in-
ves tment good s . A ccou nting d epreciation
is not calcu lated on the bas is of the mortality
d is tribu tion f or inves tment good s as s u med
by Evans , s o his treatment of replacement
inves tment is internally incons is tent.
Evans employ s a d ou ble d is tribu ted lag
mod el bas ed on the geometric d is tribu ted
lag f u nction. In terms of d es ired capital, the
lag s tru ctu re may be repres ented in the
f orm:
Kt +
-
o r[Kt-,-5
+ Kt- T6]
2
00
-1-o + Xl X2
=2 E XoTK+t-- +_ 2
X X or[K+ t-,5 + K+t-Tr-6],
Tr=O
or:
xl
Kt- XoKt-,
+
-
[Kt-5
+ Kt-6]
2
= A 2K+t_
I + - XO + Xl - X2
2
[K+t_s + K+t-6].
A d d ing replacement inves tment this rela-
tions hip becomes :
1 - XO + Xl
- X2]
It = 2K'+t-l
+2
* [K+t-5 + K+ t6] + [Xo -]Kt_
+ [ 2] [Kt5 + Kt-6],
where 3 is the rate of replacement. If K+
involves an u nknown parameter, the param-
eters X1 and 8 cannot be id entif ied f rom this
relations hip. It is impos s ible to analy ze
Evans ' d is tribu ted lag f u nction withou t
f u rther inf ormation.
Evans s u bs titu tes capacity u tilization f or
the terms in Kt-1+ and Kt-1. He makes d e-
s ired capital in the term Kt6++Kt6+
a linear
f u nction of s ales , cas h f low, and the interes t
rate. Denoting Kt-5++Kt6+
by
Ks 6+,
and
s o on, a f ormal vers ion of the Evans mod el
may be repres ented as f ollows :
(8)
A t =
o
+
#1Cp1
+ #2S 56
+ 33K56 + f 34L56 + i56,
where Cpl is capacity u tilization lagged once,
S 56 is the s u m of s ales lagged f ive and s ix
period s , K66 is the s u m of s imilarly lagged
capital s tock, L46 is the s u m of lagged cas h
f low, and
iv
is the s u m of lagged interes t
rates [37, Evans , 1967, p. 156]. Capacity
u tilization Cp is the Wharton S chool capac-
ity ind ex, s ales S and cas h f low L are taken
f rom the S EC-FTC Qu arterly Financial
Report, capital K is a book valu e compu ted
f rom the s ame d ata, and i is Mood y 's A A A
corporate bond rate, the interes t rate em-
ploy ed by Mey er and Glau ber and by Res ek.
To apprais e Evans ' res u lts , we employ the
s ame proced u re as f or the A nd ers on and
Res ek mod els ; the res u lts are pres ented in
Table 4. From this table it is clear that s ales
and capacity u tilization are s ignif icant d e-
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1124 Jou rnal of Economic Literatu re
TA BLE 4
S IGNIFICA NCE OF DETERMINA NTS OF INVES T-
MENT EXPENDITURES , EVA NS MODEL,
THIRTEEN INDUS TRY GROUPS ,
19491-19631V
(F.05;5,54= 2.39, S =3.5)
S ignif icant Ins ignif icant
Deter- Coef f icients Coef f icients
minant
Right Wrong Right Wrong
S ign S ign S ign S ign
Cp 9 3 1
K 2 2 6 3
S 6 6 1
L 3 6 4
i 3 7 3
S ou rce: Evans [37, 1967, Table 1, p. 156].
terminants of d es ired capital. Capacity u tili-
zation Cp is s ignif icant f or 9 of the 13 in-
d u s try grou ps and has the wrong s ign f or
only one. S ales S is a s ignif icant variable f or
s ix ind u s tries and als o has only one wrong
s ign. Capital s tock K, meas u red as the book
valu e of net f ixed as s ets d ef lated by the cu r-
rent price ind ex f or inves tment good s , is s ig-
nif icant f or f ou r ind u s tries ; the s ign is pos i-
tive f or two of thes e ind u s try grou ps and
negative f or two. The s ign of the coef f icient
of capital s tock d epend s on the relative mag-
nitu d e of the rate of replacement a and the
ad ju s tment coef f icient Xi. If replacement re-
qu irements pred ominate, the coef f icient of
capital s tock has a pos itive s ign; we take this
s ign to be the right one. A lternatively , if the
ad ju s tment coef f icient pred ominates , the co-
ef f icient of capital s tock is negative. Cas h
f low L anid the interes t rate i are barely s ig-
nif icant as d eterminants of inves tment ex-
pend itu res . Each one is s ignif icant f or only
three ind u s try grou ps ; wrong s igns occu r f or
the coef f icients of cas h f low in f ou r ind u s tries
and f or the interes t rate in three ind u s tries .
Upon empirical tes ting the Evans mod el re-
d u ces to an ord inary f lexible accelerator with
d es ired capital proportional to ou tpu t.
3.6. Eis ner's accelerator mod el
We have reviewed the application of Eis -
ner's mod el of inves tment to time s eries d ata
f or ind ivid u al f irms . We next review Eis ner's
s tu d y of inves tment behavior f or ind u s try
grou ps . The d eterminants of inves tment in-
clu d e changes in s ales , changes in prof its ,
and , f or replacement inves tment, level of
capital s tock. Inves tment net of replacement
equ als a weighted average of pas t changes
in ou tpu t. Changes in prof its are introd u ced
as a pos s ible repres entation of changes in
"the expected prof itability of inves tment"
[31, Eis ner, 1965, p. 97]. In an earlier s tu d y
the relations hip of this mod el to the theory
of the f irm is characterized by Eis ner as
f ollows :
... The acceleration principle whos e manif es tations we
s hall note and inves tigate is not the s imple f irs t or
s econd ord er d if f erence equ ation f requ ently pres ented ,
pres u mably in the interes t of ped agogical
clarity r.
Rather, we have in mind a world of ris k and u ncertainty
in which bu s ines s f irms s trive to maximize the mathe-
matical expectation of s ome monotonic increas ing f u nc-
tion of expected f u tu re prof it, s u bject to a prod u ction
f u nction with d ecreas ing marginal retu rns to each f actor
and pos itive cros s partial d erivatives . This means , in
particu lar, that f or a f irminitially in equ ilibriu mit pay s
to increas e the s tock of capital f or permanent or cer-
tainly expected increas es in d emand f or ou tpu t [26,
1960, p. I].
Eis ner treats the time s tru ctu re of inves t-
ment behavior as a mod if ication of Koy ck's
d is tribu ted lag f u nction, with weights d eter-
mined arbitrarily f or the f irs t lagged valu es
of prof its and s ales and then d eclining geo-
metrically [29, 1962. p. 198]. He has applied
the complete mod el to d ata f rom the OBE-
S EC S u rvey f or total d u rable and total non-
d u rable manu f actu ring ind u s tries f or the
realization of inves tmernt expend itu res , given
anticipations . He has als o applied s imilar
mod els to annu al inves tment expend itu re
d ata f rom the McGraw-Hill S u rvey f or in-
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1125
d u s try grou ps [26, p. II]. For this annu al
d ata he characterizes the inves tment proces s
time s tru ctu re by a f inite d is tribu ted lag
f u nction.
Eis ner's s pecif ication of the d eterminants
of inves tment expend itu res and of the time
s tru ctu re of the inves tment proces s f or
qu arterly time s eries is the f ollowing:
A t
=
jB3 + IBlA S t-1 + 321A S t-2
(9) + f l3A Pt-1 + t4A Pt-2 + #3A t_j
+ #6Kt + ,e.
In this mod el A S is change in s ales , A P is
change in prof its , K is capital s tock at the
beginning of the period . The lagged valu e of
inves tment expend itu res is introd u ced to
repres ent the ef f ects of changes in s ales and
prof its lagged more than two period s ; the
weights as s ociated with thes e changes d ecline
geometrically . S ales are d ef lated by the
wholes ale price ind ex f or each ind u s try grou p
and prof its are d ef lated by the price ind ex of
inves tment good s . Capital s tock is meas u red
by the d eclining balance method s o that
Eis ner's treatment of replacement inves t-
ment in the s tu d y of ind u s try grou ps , u nlike
his treatment in the s tu d y of ind ivid u al
f irms , is internally cons is tent. No overall
apprais al of Eis ner's mod el on the bas is of
res u lts f or ind ivid u al ind u s try grou ps can
be mad e becau s e Eis ner has f itted the mod el
only f or realizations of inves tment expend i-
tu res and only f or the totals of d u rable and
nond u rable manu f actu ring ind u s tries [31,
1965, p. 105]. For thes e grou pings only one
of the f ou r coef f icients as s ociated with
change in prof its exceed s its s tand ard error.
A f ter empirical tes ting, Eis ner's mod el
red u ces to the f lexible accelerator of Chenery
and Koy ck.
3.7. Hickman's s tu d y of inves tment
The d eterminants of inves tment behavior
in Hickman's mod el are ou tpu t, capital
s tock, wage rate, rental price of capital, price
of ou tpu t and a time trend [57, 1965, pp.
28-32]. Hickman employ s a logarithmic
f orm of the f lexible accelerator, s imilar to
that u s ed by Koy ck,
00
ln Kt =
x&4[Xi
ln K+t-T + X2 ln K+tr_i
T=O
+ (1
-
XO - Xl - X2) ln K+tr_2].
In Koy ck's f orm of the d is tribu ted lag f u nc-
tion 1-Xo-X1-X2=0 and X2
=
1-XO-1-
Hickman d is tingu is hes between an expecta-
tions lag in the d etermination of d es ired
capital and an ad ju s tment lag between actu al
and d es ired capital; as s u ming a cons tant rate
of ad ju s tment, he id entif ies the two lags
s eparately [57, 1965, pp.
36-38].
Hickman
makes the logarithm of d es ired capital
a linear homogeneou s f u nction of ou t-
pu t and a price ratio. The price ratio is
taken, alternatively , as the wage rate d i-
vid ed by the rental price of capital and the
rental price of capital d ivid ed by the price
of ou tpu t. The mod el is completed by ad d -
ing a time trend . The mod el is f itted to
annu al d ata f or 1949-60, a total of twelve
annu al obs ervations . A s many as eight co-
ef f icients are d etermined f rom thes e d ata-
three ou tpu t terms , three price terms , the
coef f icient of the time trend and a cons tant
term.
A f ormal vers ion of the mod el u s ed by
Hickman to analy ze d ata f or ind ivid u al in-
d u s try grou ps within manu f actu ring is :
ln Kt - ln Kt-,
-
3o + f 1T + 32(ln Yt - In K7t1)
+
,33(ln
Yt1 - In Kt-1)
+( 4(ln Yt-2
-
ln Kt-1)
+ 5 ln Pt +36 Iln Pt-
+ 37 In Pt-2 + ,t
where Y is ou tpu t, K is capital s tock, P is
a price ratio, and T a time trend . Capital
s tock is es timated by Hickman u s ing d e-
clining balance replacement or, equ ivalently ,
a geometric mortality d is tribu tion. Ou tpu t
is meas u red as real gros s prod u ct originating
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1126 Jou rnal of Economic Literatu re
in each ind u s try , es timated by the OBE. The
price of ou tpu t is the price ind ex implicit in
nominal and real gros s prod u ct originating,
as es timated by the OBE. The rental price
of capital s ervices is the prod u ct of the in-
ves tment good s price ind ex and the s u m of
interes t and d epreciation rates . The d epre-
ciation rate is a cons tant equ al to the re-
placement rate; the interes t rate is Mood y 's
A A A ind u s trial bond rate. The wage rate is
employ ee compens ation per man-hou r as
es timated by Charles S chu ltze [57, 1965, pp.
42-44]. A f ter a comparis on of alternative
pos s ible s pecif ications , Hickman's mod el,
like that of Eis ner, red u ces to the f lexible
accelerator mod el of Chenery and Koy ck.
Except f or the pres ence of a third lagged
term in ou tpu t, the lag s pecif ication is the
s ame as that employ ed by Koy ck [57, 1954,
pp. 54-56].
3.8. Bou rneu f 's s tu d y of capacity and inves t-
ment
The d eterminants of inves tment behavior
in Bou rneu f 's mod el are limited to ou tpu t
and capacity [10, 1964, p. 609]. A f ormal
vers ion of this mod el is :
A t
=
)3o + 31(Ct- -Yt-1)
+ 32Cb,t + f 33A Yt + Et,
where C is average capacity d u ring the pe-
riod , Cb capacity at the beginning of the
period and Y is ou tpu t. Ou tpu t is meas u red
by the Fed eral Res erve Board ind ex of in-
d u s trial prod u ction, and capacity is meas u red
by the McGraw-Hill capacity ind ex f or each
ind u s try [10, pp. 608-09]. Capacity at the
beginning of the period Cb is intend ed to ad -
ju s t f or the ef f ect of replacement inves tment.
The lag s tru ctu re implicit in this relations hip
can be brou ght ou t by letting A t-132Gb,
repres ent net inves tment. Then:
A Kt
==
/0 + 33
Yt-(#1
+
03)
Y1
(11)
:
+
0
Kt-1,
a
where c =
K/C, the ratio of capital s tock to
capacity . This relations hip is an arithmetic
vers ion of Koy ck's f lexible accelerator.
The relations hip d es cribed above is f itted
to annu al d ata f or 13 ind u s try grou ps , 1950-
61 [10, pp. 617-18]. To apprais e the res u lts
we emplov S chef f e's S -method as bef ore;
tes ts of s ignif icance are given in Table 5. The
d if f erence between capacity and ou tpu t is a
highly s ignif icant d eterminant of inves tment
expend itu res with s ignif icant coef f icients
with the right s ign f or 7 of the 13 in-
d u s tries . Capacity at the beginning of the
period , repres enting replacement requ ire-
ments generated by exis ting capital s tock, is
als o s ignif icant as a d eterminant of inves t-
ment with s ignif icant coef f icients with the
right s ign in 5 of the 13 ind u s tries . Only
the change in ou tpu t is barely s ignif icant as
a d eterminant of inves tment. Thes e res u lts
s u bs tantiate the conclu s ions of A nd ers on,
Res ek, Evans , Eis ner, and Hickman that
capacity u tilization is an important d eter-
minant of inves tment expend itu res .
3.9. Jorgens on and S tephens on's s tu d y of in-
ves tment
The f inal s tu d y of inves tment by ind u s try
grou ps to be inclu d ed in ou r s u rvey is that
of Jorgens on and S tephens on [67, 1967]. We
have reviewed the application of mod els
TA BLE 5
S IGNIFICA NCE OF DETERMINA NTS OF
INVES TMENT EXPENDITURES ,
BOURNEUF MODEL, THIRTEEN
INDUS TRY GROUPS , 1950-1961
(F.05;3,8= 4.07, S = 3.5)
S ignif icant Ins ignif icant
Deter-
Coef f icients Coef f icients
minant
Right Wrong Right Wrong
S ign S ign S ign S ign
C-Y 7 5 1
Gb 5 7 1
A Y 3 8 2
S ou rce: Bou rneu f [10, 1964, Table 4, pp.
617-18].
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1127
bas ed on optimal capital accu mu lation to
time s eries d ata f or ind ivid u al f irms
by
Jorgens on and S iebert. The mod el
employ ed
in analy zing time s eries d ata f or ind u s try
grou ps by Jorgens on and S tephens on corre.
s pond s to the Jorgens on-S iebert mod el, Neo-
clas s ical II; capital gains are regard ed as
trans itory s o retu rn to equ ity is meas u red ex-
clu d ing capital gains .
The Jorgens on-S tephens on mod el takes
the f orm:
A t
=
,Oo
+ ,IA (-) + 2A 2 (-)
c
t-4 c t_ 5
+ ,.3 (PQ ) + 4A 4 (-)
c t-6 c t-7
+ ,35(A - S K)t_ + 36(A - S K)t2
+ /37Kt + et.
In this mod el pQ-is gros s valu e ad d ed in cu r-
rent prices ; c is the price of capital s ervices ,
d ef ined as :
1 u v -u w
c
==
q 1- + 1---r,
where q is the p rice of inves tment good s , a
the rate of replacement, r the cos t of capital,
u the tax rate, v theproportionof d epreciation
d ed u ctible f rom income f or tax pu rpos es , and
w the proportion of the cos t of capital d e-
d u ctible f rom income. Capital s tock at the
beginning of the period K is es timated f rom
inves tment d ata, u s ing a perpetu al inventory
method bas ed on d eclining balance replace-
ment. The valu e of ou tpu t is taken to be
gros s valu e ad d ed in each ind u s try ; com-
ponents of valu e ad d ed and the tax s tru c-
tu re are taken f rom the U.S . national income
and prod u ct accou nts , d is tribu ted by qu ar-
terly d ata f rom the S EC-FTC Qu arterly
Financial Report. The cos t of capital is the
ratio of retu rn to capital net of d epreciation
to the market valu e of the f irm [67, p. 218].
Jorgens on, J. Hu nter, and M. I. Nad iri have
compared the perf ormance of the Jorgens on-
S tephens on mod el with that of the A nd ers on,
Eis ner and Mey er-Glau ber mod els f or
qu arterly d ata on inves tment expend itu res
f or f if teen two-d igit ind u s try grou ps
within manu f actu ring f or the period 1949-
64 [62, 1970 and 63, 1970]. The Eis ner
mod el ef f ectively red u ces to the f lexible ac-
celerator of Chenery and Koy ck; s imilarly ,
the Bou rneu f , Evans , and Hickman mod els
are es s entially vers ions of the f lexible ac-
celerator mod el with d es ired capital propor-
tional to ou tpu t. The A nd ers on, Mey er-
Glau ber, and Res ek mod els incorporate in-
ternal f u nd s , the cos t of external f u nd s , and
capacity u tilization as d eterminants of in-
ves tment expend itu res . In the Mey er-
Glau ber mod el only internal f u nd s emerge as
a s ignif icant d eterminant of inves tment. In
the A nd ers on and Res ek mod els only capac-
ity u tilization and the cos t of external f u nd s
are s ignif icant.
A mong the mod els compared by Jorgen-
s on, Hu nter, and Nad iri, the bes t explanation
of inves tment behavior f or ind ivid u al ind u s -
try grou ps is provid ed by the Jorgens on-
S tephens on mod el [62, 1970, pp. 206-09].
This mod el is s u perior to the A nd ers on and
Mey er-Glau ber mod els f or f ou rteen of f if teen
ind u s try grou ps and to the Eis ner mod el
f or eleven of f if teen grou ps . The s econd -
ranking mod el is the Eis ner mod el; it is
s u perior to the Mey er-Glau ber mod el f or
twelve of f if teen ind u s try grou ps and to the
A nd ers on mod el f or all f if teen grou ps .
Finally , the Mey er-Glau ber mod el is s u perior
to the A nd ers on mod el f or eleven of the
f if teen grou ps . In terms of the mod els of in-
ves tment behavior f or ind ivid u al f irms , thes e
res u lts may be s u mmarized as f ollows :
1. Neoclas s ical
2. A ccelerator
3. Liqu id ity
This ranking coincid es with that f or ind ivi-
d u al f irms bas ed on the res u lts of Jorgens on
and S iebert [65, 1968, pp. 1142-43].
4. S u mmary and Conclu s ion
4.1. S u mmary
The main f eatu res of econometric mod els
of inves tment behavior inclu d ed in ou r s u r-
vey are s u mmarized in Table 6. We can com-
pare alternative mod els with res pect to d e-
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TA BLE 6
COMPA RIS ON OF A LTERNA TIVE INVES TMENT FUNCTIONS
A . Ind ivid u al Firms , A nnu al Obs ervations
Determinants of Time S tru ctu re of Replacement
Des ired Capital Inves tment Proces s Inves tment
Eis ner McGraw-Hill d ata on plant Change in s ales , d ef lated by Finite d is tribu ted lag f u nc- Replacement rate
and equ ipment expend i- ind u s try wholes ale price in- tion. proportional to d e-
tu res , d ef lated by an im- d ex; prof its , d ef lated by in- preciation charges
plicit price d ef lator f or pro- ves tment price ind ex; d e- d ivid ed by gros s
d u cers d u rable equ ipment preciation; rate of retu rn; f ixed as s ets .
and non-res id ential con- valu e of the f irm.
s tru ction, 1955-62.
Gru nf eld Mood y 's d ata on gros s ad - Valu e of the f irm, d ef lated Geometric d is tribu ted lag Replacement pro-
d itions to plant and equ ip- by the implicit price d ef lat- f u nction. portional to net
ment plu s maintenance and or f or gros s national prod - capital s tock.
repairs , d ef lated by an im- u ct; Mood y 's A aa corpo-
plicit price d ef lator f or rate bond rate.
prod u cers ' d u rable equ ip-
ment, 1935-54.
Jorgen- Mood y 's d ata on gros s ad d i- Gros s valu e ad d ed in cu r- Rational d is tribu ted lag Replacement pro-
s on- tions to plant and equ ip- rent prices ; price of inves t- f u nction. portional to net
S iebert ment, d ef lated by an implic- ment good s ; d epreciation; capital s tock.
it d ef lator f or prod u cers ' rate of retu rn; rate of
d u rable equ ipment and growth of the price of in-
non-res id ential cons tru c- ves tment good s ; tax s tru c-
tion, 1937-63. tu re.
Ku h Mood y 's d ata on gros s ad d i- S ales and retained earnings Geometric d is tribu ted lag Replacement pro-
tions to plant and equ ip- plu s d epreciation, d ef lated f u nction. portional to gros s
ment, d ef lated by an implic- by inves tment price ind ex. capital s tock.
it price d ef lator f or prod u c-
ers ' d u rable equ ipment and
non-res id ential cons tru c-
tion, 1935-55.
B. Ind u s try Grou ps , A nnu al Obs ery ations
Bou rneu f OBE-S EC d ata on plant FRB ind ex of ind u s trial Weight of f irs t valu e of ou t- Replacement pro-
and equ ipment expend i- prod u ction; McGraw-Hill pu t (FRB ind ex) arbitrary ; portional to capac-
tu res , d ef lated by an implic- capacity ind ex. remaining weights d eclining ity .
it price d ef lator f or prod u c- geometrically .
ers ' d u rable equ ipment and
non-res id ential cons tru c-
tion, 1950-61.
Hickman OBE-S EC d ata on plant Gros s prod u ct originating Weight of f irs t two valu es Replacement pro-
and equ ipment expend i- in cons tant prices ; price of of ou tpu t (gros s prod u ct) portional to net
tu res , d ef lated by Boeckh capital s ervices ; wage rate; and price ratio arbitrary ; capital s tock.
cons tru ction cos t ind ex f or implicit price d ef lator f or remaining weights d eclining
plant and wholes ale price gros s prod u ct originating. geometrically .
ind ex f or prod u cer f inis hed
good s f or equ ipment, 1949-
60.
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C. Ind u s try Grou ps , Qu arterly Obs ervations
Data and Time Period
Determinants
of
Time S tru ctu re
of Replacement
Des ired Capital Inves tment Proces s Inves tment
A nd ers on OBE-S EC d ata on plant S ales les s previou s maxi- Fou r qu arter moving aver- Omitted .
and equ ipment expend i- mu m s ales ; retained earn- age of each of the d etermi-
tu res , u nd ef lated , not s ea- ings plu s d epreciation; nants u s ed as ind epend ent
s onally ad ju s ted ; qu arterly s tocks of government s ecu - variables ; time trend in-
d u mmy variables inclu d ed rities ; accru ed tax liability ; clu d ed to repres ent lag in
as ind epend ent variables ; d ebt capacity ; Treas u ry bill expectations ; d ecis ion lag
f irs t qu arter, 1949, to f ou rth rate. taken to be f ixed .
qu arter, 1958.
Eis ner OBE-S EC d ata on plant Change in s ales , d ef lated by Weight of f irs t valu es of Replacement pro-
and equ ipment expend i- ind u s try wholes ale price in- change in s ales and change portional to net
tu res , d ef lated by an implic- d ex; change in prof its , d e- in prof its arbitrary ; remain- capital s tock.
it d ef lator f or prod u cers f lated by inves tment price ing weights d eclining geo-
d u rable equ ipment and non- ind ex. metrically .
res id ential cons tru ction, ad -
ju s ted f or s eas onal varia-
tions ; third qu arter, 1948,
to f ou rth qu arter, 1960.
Evans OBE-S EC d ata on plant S ales , d ef lated by wholes ale Three-parameter rational Replacement pro-
and equ ipment expend i- price ind ex exclu d ing f armd is tribu ted lag f u nction. portional to aver-
tu res , d ef lated by an implic- commod ities ; Wharton in- age of net capital
it d ef lator f or prod u cers ' d ex of capacity u tilization; s tock lagged f ive
d u rable equ ipment and non- retained earnings plu s d e- and s ix qu arters .
res id ential cons tru ction, ad - preciation, d ef lated by in-
ju s ted f or s eas onal varia- ves tment price ind ex;
tions ; f irs t qu arter, 1949, to Mood y 's A A A corporate
f ou rth qu arter, 1963. bond rate.
Jorgen- OBE-S EC d ata on plant Gros s valu e ad d ed in cu r- Rational d is tribu ted lag Replacement pro-
s on- and equ ipment expend i- rent prices ; price of inves t- f u nctions . portional to net
S tephen- tu res , d ef lated by an implic- ment good s ; d epreciation, capital s tock.
s on it d ef lator f or prod u cers ' rate of retu rn; tax s tru c-
d u rable equ ipment and non- tu re.
res id ential s tru ctu res , ad -
ju s ted f or s eas onal varia-
tions ; f irs t qu arter, 1949, to
f ou rth qu arter, 1960.
Mey er- OBE-S EC d ata on plant Capacity u tilization-ratio Weights alternately zero Omitted .
Glau ber and equ ipment expend i- of FRB ind ex of ind u s trial and d eclining geometrically .
tu res , d ef lated by an implic- prod u ction to McGraw-Hill
it d ef lator f or prod u cers ' capacity ind ex; retained
d u rable equ ipment and non- earnings plu s d epreciation,
res id ential cons tru ction, not d ef lated by inves tment
s eas onally ad ju s ted ; qu ar- price ind ex; Mood y 's A A A
terly d u mmy variables in- corporate bond rate; change
clu d ed as ind epend ent vari- in S tand ard and Poor's
ables ; f irs t qu arter, 1950, to s tock price ind ex.
f ou rth qu arter, 1958.
Res ek OBE-S EC d ata on plant Change in FRB ind ex of in- Finite d is tribu ted lag f u nc- Replacement pro-
and equ ipment expend i- d u s trial prod u ction; d ebt tion, weights d etermined portional to net
tu res , d ef lated by an implic- capacity ; Mood y 's A A A f romregres s ion of expend i- capital s tock.
it d ef lator f or prod u cers corporate bond rate; S EC tu res on appropriations .
d u rable equ ipment and non- ind u s try s tock price ind ex.
res id ential cons tru ction, not
s eas onally ad ju s ted ; qu ar-
terly d u mmy variables in-
clu d ed as ind epend ent vari-
ables ; f irs t qu arter, 1953, to
to f ou rth qu arter, 1962.
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1130 Jou rnal of Economic Literatu re
terminants of d es ired capital, the time s tru c-
tu re of the inves tment proces s , and the treat-
ment of replacement inves tment. Mod els of
inves tment behavior d if f er s u bs tantially in
all three res pects . For each mod el the d ata
and time period of the s tu d y are given in the
f irs t colu mn of Table 6. This inf ormation is
f ollowed by a lis t of the d eterminants of d e-
s ired capital, by a characterization of the
time s tru ctu re of the inves tment proces s , and
by a d es cription of the treatment of replace-
ment inves tment.
4.2. Determinants of d es ired capital
The d eterminants of the d es ired level of
capital may be d ivid ed into three grou ps : 1)
capacity u tilization, repres ented by the ratio
of ou tpu t to capacity , the d if f erence between
ou tpu t and capacity , change in ou tpu t, s ales
les s previou s peak of s ales , and s o on; 2) in-
ternal f inance, repres ented by the f low of in-
ternal f u nd s , the s tock of liqu id as s ets , d ebt
capacity , and accru ed tax liability ; 3) ex-
ternal f inance, repres ented by interes t rates ,
rates of retu rn, s tock prices , the market valu e
of the f irm. Ou r f irs t objective is to evalu ate
the role of thes e grou ps of variables in the
explanation of inves tment behavior.
Capacity u tilization appears as a highly
s ignif icant d eterminant of the d es ired capital
in mos t of the s tu d ies we have cons id ered .
Meas u res of capacity u tilization appearing
as s ignif icant d eterminants of inves tment in-
clu d e A nd ers on's meas u re of s ales les s pre-
viou s peak s ales , Bou rneu f 's d if f erence be-
tween the FRB ind ex of ind u s trial prod u c-
tion and the McGraw-Hill capacity ind ex,
and the Wharton S chool capacity ind ex em-
ploy ed by Evans . The level of real ou tpu t
may be regard ed as a meas u re of capacity
u tilization in a relations hip als o inclu d ing
capital s tock. Meas u res of ou tpu t employ ed
in this way inclu d e d ef lated s ales as employ ed
by Ku h, Hickman's real gros s prod u ct
originating, Res ek's change in the FRB in-
d ex of ind u s trial prod u ction, and the change
in d ef lated s ales employ ed by Eis ner in the
s tu d y of ind u s try grou ps .
Only the Mey er-Glau ber meas u re of ca-
pacity u tilization, bas ed on the ratio of the
FRB ind ex to the McGraw-Hill capacity in-
d ex, f ails to appear as a s ignif icant d eter-
minant of d es ired capital. This f ind ing con-
f licts s harply with that of Bou rneu f , who
f ind s that the d if f erence between thes e
variables is highly s ignif icant. Change in d e-
f lated s ales d oes not appear as a s ignif icant
d eterminant of d es ired capital in Eis ner's
time s eries s tu d y f or ind ivid u al f irms . This
f ind ing conf licts with Eis ner's res u lts f or
lime s eries of ind u s try grou ps .
Capacity u tilization or ou tpu t provid es
the only s ignif icant d eterminant of d es ired
capital f or s everal of the mod els of inves t-
ment behavior inclu d ed in ou r s u rvey . Thes e
mod els inclu d e Ku h's mod el of f irm time
s eries and the mod els of Bou rneu f , Eis ner,
Evans , and Hickman f or ind u s try grou ps .
A ll of thes e mod els red u ce to the f lexible ac-
celerator mod el of Chenery and Koy ck with
d es ired capital proportional to ou tpu t. The
mos t important d if f erence between the mod -
els of inves tment propos ed by Eis ner, Evans ,
and Hickman and the mod els of Bou rneu f ,
Chenery , Koy ck, and Ku h is in the charac-
terization of the time s tru ctu re of the in-
ves tment proces s . We will d is cu s s alternative
characterizations of the time s tru ctu re in
more d etail below.
The s tu d ies of ind ivid u al f irms by Gru n-
f eld and by Jorgens on and S iebert and the
s tu d y of ind u s try grou ps by Jorgens on and
S tephens on are the only s tu d ies we have re-
viewed that d o not inclu d e capacity u tiliza-
tion or real ou tpu t as a pos s ible explanatory
variable. The Jorgens on-S iebert and Jor-
gens on-S tephens on mod els embod y a d e-
s cription of technology bas ed on a Cobb-
Dou glas prod u ction f u nction or, equ iva-
lently , a CES prod u ction f u nction with
cons tant retu rns to s cale and elas ticity of
s u bs titu tion equ al to u nity . Real ou tpu t
enters together with the ratio of its price to
the price of capital s ervices . The Gru nf eld
mod el d oes not inclu d e real ou tpu t as a d eter-
minant of inves tment behavior.
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1131
A f lexible accelerator mod el with d es ired
capital proportional to ou tpu t embod ies a
s pecialization of the d es cription of technol-
ogy bas ed on the CES prod u ction f u nction
[4, 1961]. This s pecialization corres pond s to
a d es cription of technology with cons tant re-
tu rns to s cale and elas ticity of s u bs titu tion
equ al to zero. For a CES prod u ction f u nc-
tion with zero elas ticity of s u bs titu tion, the
capital-ou tpu t ratio is cons tant and the d e-
terminants of inves tment d o not inclu d e the
prices of ou tpu t or capital s ervices . The
prod u ction f u nction is characterized by f ixed
technical coef f icients ; the f ixed coef f cents
prod u ction f u nction was originally employ ed
by Chenery and Koy ck in d eriving the f lex-
ible accelerator mod el of inves tment be-
havior.
Evid ence on the f orm of the prod u ction
f u nction bas ed on d irect es timation of the
prod u ction f u nction is pres ented by P.
Zarembka f or two-d igit manu f actu ring in-
d u s tries f or 1957 and 1958 [108, 1970 and
109, 1969]. Zarembka f irs t tes ts the hy -
pothes is that the elas ticity of s u bs titu tion
and the s cale parameter are the s ame f or the
two y ears . This hy pothes is is accepted ; pro-
ceed ing cond itionally , Zarembka tes ts the
hy pothes es that the s cale parameter is equ al
to u nity and that the elas ticity of s u bs titu -
tion is equ al to u nity . Both hy pothes es are
accepted , s o the CES prod u ction f u nction re-
d u ces to the Cobb-Dou glas with cons tant
retu rns to s cale. Z. Griliches has carried ou t
a s imilar s tu d y f or 1958; the hy pothes is that
d is tribu tion, ef f iciency and s cale parameters
are the s ame f or all ind u s try grou ps is em-
ploy ed in Griliches ' s tu d y [45, 1967; 46, 1967
and 47, 1968]. This hy pothes is is incons is tent
with the evid ence [61].
A ttempts have been mad e to es timate the
d egree of retu rns to s cale and the elas ticity
of s u bs titu tion f rom marginal prod u ctivity
cond itions f or labor and capital by Dhry mes
[19, 1965] and by Eis ner and Nad iri [34,
1968]. The res u lts s u gges t increas ing re-
tu rns , invalid ating the mod el of prod u ction
employ ed by Dhry mes [19, p.
364]
and by
Eis ner and Nad iri [34, p. 373]. Equ ality be-
tween the marginal prod u ct of labor and the
real wage, and between the marginal prod u ct
of capital and the real rental, are neither
neces s ary nor s u f f icient f or prof it maximiza-
tion u nd er increas ing retu rns . The res u lts of
Eis ner and Nad iri have been traced to an
error in the s tochas tic s pecif ication of their
mod el by Bis chof f [9, 1969, p. 358].4 Bis chof f
f ind s that the res id u als in their d is tribu ted
lag f u nction are s erially correlated , s o their
es timates of the elas ticity of s u bs titu tion and
d egree of retu rns to s cale are incons is tent
[9, p. 359].5 When this error is corrected the
hy pothes es that the elas ticity of s u bs titu tion
and the d egree of retu rns to s cale are equ al
to u nity are not rejected [9, Table 2]; the
CES prod u ction f u nction red u ces to Cobb-
Dou glas f orm with cons tant retu rns to s cale.
The hy pothes is of cons tant retu rns to
s cale is cons is tent with es timates of the s cale
parameter f rom the CES prod u ction f u nc-
tion. This hy pothes is can als o be tes ted by
analy s is of d ata f rom engineering s tu d ies ,
growth of f irms by s ize of f irm, and the s ize
d is tribu tion of f irms . Und er cons tant retu rns
to s cale the optimal policy f or capital ac-
cu mu lation d etermines labor-ou tpu t and
capital-ou tpu t ratios and the rate of growth
of the f irm is ind epend ent of s ize. Bain's
analy s is of evid ence f rom engineering s tu d ies
s u pports the conclu s ion that retu rns to s cale
at the f irm level are increas ing u p to a f irm
s ize equ al to the minimu m optimal s ize of
plant; bey ond that point plant economies of
s cale are cons tant; there are no economies
of mu lti-plant operation [5, 1956, pp. 68-82
and 6, 1969]. This evid ence corroborates the
f ind ings f rom econometric s tu d ies of the CES
prod u ction f u nction that the d egree of re-
tu rns to s cale is equ al to u nity .
Und er cons tant retu rns to s cale the rate of
growth of capital is ind epend ent of s ize of
f irm. A n extens ive s tu d y of rates of growth
4The res u lts labeled "cl" in Bis chof f 's Table 1 are
f or the d ata employ ed by Eis ner and Nad iri.
6 This erroneotu s s pecif ication is u s ed by Eis ner
[28, 1969]; his es timates are als o incons is tent.
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1132 Jou rnal of Economic Literatu re
of as s ets f or the one thou s and larges t manu -
f actu ring f irms in the United S tates f or the
period 1946 to 1955 has been mad e by
Hy mer and Pas higian [58, 1962 ]. Their con-
clu s ion is that rate of growth of as s ets is in-
d epend ent of s ize of f irm [58, p. 558]. Ind e-
pend ence of the rate of growth of as s ets and
f irm s ize implies that the relative s ize d is -
tribu tion of f irms is s table over time. This
implication is cons is tent with evid ence on
concentration ratios in A merican manu f ac-
tu ring ind u s tries over the period 1947-63
[69, 1968, p. 241].6 The evid ence on growth
of f irms by s ize and the s ize d is tribu tion of
f irms f u rther corroborates the f ind ings f rom
econometric s tu d ies of the CES prod u ction
f u nction that retu rns to s cale are cons tant.
Zarembka has pres ented evid ence on the
elas ticity of s u bs titu tion f rom d irect es tima-
tion of the CES prod u ction f u nction. Given
cons tant retu rns to s cale as a maintained
hy pothes is , f u rther evid ence on the elas ticity
of s u bs titu tion can be obtained f rom es tima-
tion of parameters of the marginal prod u c-
tivity cond itions f or labor and capital.
Zarembka has es timated the elas ticity of
s u bs titu tion f rom the marglnal prod u ctivity
cond ition f or labor f or cros s s ection obs erva-
tions by s tates f or two-d igit manu f actu ring
ind u s tries in 1957 and 1958. He f irs t tes ts the
hy pothes is that the elas ticity of s u bs titu tion
is the s ame f or the two y ears . This hy poth-
es is is accepted ; proceed ing cond itionally ,
Zarembka tes ts the hy pothes is that the
elas ticity of s u bs titu tion is equ al to u nity
[108, 1970, p. 49]. This hy pothes is is als o
accepted s o the CES prod u ction f u nction re-
d u ces to the Cobb-Dou glas f orm. Griliches
has analy zed d ata s imilar to Zarembka's f or
1957 and 1958. He tes ts the hy pothes is that
the elas ticity of s u bs titu tion is equ al to u nity
[46, 1967, p. 2992]. A gain, the hy pothes is is
accepted , valid ating the Cobb-Dou glas f orm
of the prod u ction f u nction.
F. W. Bell and P. J. Dhry mes have at-
tempted to es timate the elas ticity of s u b-
s titu tion f rom d ata on capital inpu t and its
rental price [7, 1965 and 19, 1965]. If the
ou tpu t-capital ratio is regres s ed on the rental
price of capital, the es timated elas ticity of
s u bs titu tion is below es timates f rom a regres -
s ion of the ou tpu t-labor ratio on the wage
rate. The es timates f rom labor d ata agree
with d irect es timates of the prod u ction f u nc-
tion, bu t the es timates f rom capital d ata d o
not. A n obviou s explanation of this apparent
d is crepancy is that marginal cond itions with
no cos ts of ad ju s tment or ges tation lags are
appropriate f or labor bu t not f or capital. The
marginal prod u ct of labor is equ al to the real
wage, bu t the marginal prod u ct of capital
enters a d is tribu ted lag inves tment f u nction
of the ty pe f itted by Bis chof f . Bis chof f 's es -
timates of the elas ticity of s u bs titu tion are
cons is tent with d irect es timates of the pro-
d u ction f u nction. For cros s s ection es timates
of the prod u ction f u nction and the marginal
prod u ctivity cond ition f or labor and time
s eries es timates of a d is tribu ted lag inves t-
ment f u nction incorporating the marginal
prod u ctivity cond ition f or capital, the evi-
d ence is cons is tent with an elas ticity of
s u bs titu tion equ al to u nity and with con-
s tant retu rns to s cale.
The as s u mption of cons tant retu rns to
s cale that u nd erlies the f ixed coef f icients pro-
d u ction f u nction is cons is tent with the evi-
d ence we have reviewed on the d es cription
of technology . The s econd as s u mption u n-
d erly ing the f ixed coef f icients prod u ction
f u nction, that the elas ticity of s u bs titu tion
is equ al to zero, is d irectly contrad icted by
the evid ence we have reviewed [61]. The
f ixed coef f icients d es cription of technology is
implicit in the mod els of inves tment be-
havior employ ed by Bou rneu f , Evans , Hick-
man, and Ku h. For Evans , Hickman, and
Ku h this characterization emerges as the
res u lt of a comparis on among alternative
s pecif ications of the inves tment f u nction.
The f ixed coef f icients d es cription of technol-
ogy has been employ ed by Eis ner in the
I
The concentration meas u res are ratios of the valu e
of s hipments f or the f ou r larges t, eight larges t, and
twenty larges t f irms in each f ou r-d igit ind u s try to the
valu e of s hipments f or the ind u s try .
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1133
s tu d y of inves tment by ind ivid u al f irms and
ind u s try grou ps extend ing over a period of
15 y ears [30, 1967; 26, 1960; 29, 1962; 27,
1963; 25, 1964; 31, 1965; 32, 1969; 28, 1969
and 33,
1970].
The as s u mptions of cons tant
retu rns and elas ticity of s u bs titu tion equ al
to u nity employ ed by Jorgens on, S iebert,
and S tephens on are cons is tent with the evi-
d ence we have reviewed .
We now tu rn to d eterminants of d es ired
capital other than ou tpu t and capacity
u tilization. Thes e d eterminants may be d i-
vid ed into two grou ps -internal f inance and
external f inance. Variables as s ociated with
internal f inance d o not appear as s ignif icant
d eterminants of d es ired capital in any mod el
that als o inclu d es ou tpu t as a s ignif icant d e-
terminant. Cas h f low variables employ ed by
A nd ers on and Evans are not s ignif icant as
d eterminants of inves tment; es s entially the
s ame variable appears as the only s ignif icant
d eterminant in the Mey er-Glau ber mod el.
The res u lts of A nd ers on and Evans contra-
d ict thos e of Mey er and Glau ber. Ku h's
s tu d y of time s eries f or ind ivid u al f irms pro-
vid es a d irect comparis on of mod els bas ed on
s ales and mod els bas ed on cas h f low. The
s ales mod els are s u perior in all time s eries
comparis ons . Other meas u res of internal
f inance employ ed by A nd ers on-s tocks of
government s ecu rities , accru ed tax liability ,
d ebt capacity -are not s ignif icant as d e-
terminants of d es ired capital. Res ek's mea-
s u re of d ebt capacity is als o not s ignif icant.
A mong variables as s ociated with external
f inance, the interes t rate appears as a s ig-
nif icant d eterminant of d es ired capital in the
A nd ers on and Res ek mod els . The interes t
rate is barely s ignif icant in the Evans and
Mey er-Glau ber mod els . A n ind ex of s tock
prices is highly s ignif icant in the Res ek
mod el; the rate of change of this ind ex is not
s ignif icant in the Mey er-Glau ber mod el.
With the exception of the Mey er-Glau ber
mod el, variables meas u ring the cos t of ex-
ternal f inance play a more important role
than variables repres enting internal f inance.
External f inance variables are, however,
d ef initely s u bord inate to variables as s ociated
with ou tpu t. External f inance appears as a
s ignif icant d eterminant of d es ired capital
only in mod els s u ch as the A nd ers on and
Res ek mod els , with ou tpu t a highly s ignif -
icant d eterminant.
We have alread y obs erved that Gru nf eld 's
s tu d y of inves tment by ind ivid u al f irms d oes
not inclu d e ou tpu t or capacity u tilization as
a pos s ible d eterminant of d es ired capital. In
this mod el d es ired capital is proportional to
the market valu e of the f irm. A nother mod el
s tu d ied by Gru nf eld is equ ivalent in per-
f ormance to the market valu e mod el. De-
s ired capital d epend s on the interes t rate,
the prod u ct of the interes t rate, and the
market valu e of the f irm. This prod u ct play s
the role of ou tpu t in other mod els of inves t-
ment. Ou tpu t, repres ented by the prod u ct
of the interes t rate and the market valu e of
the f irm, is the mos t s ignif icant d eterminant
of d es ired capital; the cos t of external f u nd s ,
repres ented by the interes t rate, is als o s ig-
nif icant bu t d ef initely s u bord inate to ou tpu t.
S imilarly , in Eis ner's mod el f or f irm time-
s eries , prof its play the role of ou tpu t, and
the rate of retu rn meas u res the cos t of ex-
ternal f inance.
Ou r overall conclu s ion is that where in-
ternal f inance variables appear as s ignif icant
d eterminants of d es ired capital, they repre-
s ent the level of ou tpu t. Where both ou tpu t
and cas h f low are inclu d ed as pos s ible d eter-
minants , only one is a s ignif icant d eter-
minant. The prepond erance of evid ence
clearly f avors ou tpu t over cas h f low.7
The s tu d ies by Jorgens on and S iebert of
inves tment by ind ivid u al f irms , and by
Jorgens on and S tephens on of inves tment by
ind u s try grou ps , inclu d e the cos t of external
f inance as part of the price of capital s er-
vices . In both s tu d ies the cos t of external
f inance is meas u red as a weighted average of
the rate of retu rn on equ ity and the rate of
interes t on d ebt, In the Jorgens on-S iebert
s tu d y the rate of retu rn on equ ity is mea-
7This conclu s ion corroborates the res u lts of Ku h
[76, 1963, p. 213].
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1134 Jou rnal of Economic Literatu re
s u red in two alternative way s -inclu d ing
and exclu d ing capital gains on as s ets as part
of the retu rn to equ ity . The cos t of external
f inance enters the price of capital s ervices
along with the price of capital good s , d e-
preciation, the rate of growth of the price of
inves tment good s , and variables repres enting
the tax s tru ctu re. In the Jorgens on-S tephen-
s on s tu d y the rate of retu rn on equ ity is
meas u red exclu d ing capital gains on as s ets .
The f ind ings on the role of internal and ex-
ternal f inance we have reviewed d irectly
contrad ict the bas ic premis e of the theory
of f inance propou nd ed by Mey er and Ku h
[86, 1957] and by Du es enberry [22, 1958].
In this theory the cos t of internal f u nd s is
below the cos t of external f u nd s . The s ched -
u le repres enting the s u pply of f u nd s to the
f irm is d is continu ou s at the point where
internal f u nd s are exhau s ted . Divid end
policy and f inancial s tru ctu re are important
d eterminants of the cos t of capital and
of inves tment behavior. Interpreting the
cas h f low variable in the Mey er-Glau ber
mod el as repres enting ou tpu t, which d oes
not otherwis e appear as a s ignif icant d e-
terminant of d es ired capital, there is no
evid ence to s u pport the theory of f inance
of Mey er, Ku h, and Du es enberry . De-
s ired capital is ind epend ent of cas h f low,
hold ings of liqu id as s ets , and d ebt capacity .
This evid ence implies that the cos t of capital
is ind epend ent of the availability of internal
f u nd s . Ind epend ence of the cos t of capital
and f inancial policies d etermining d ivid end
pay ments and f inancial s tru ctu re is , of cou rs e,
the principal conclu s ion of the Mod igliani-
Miller theory of f inance [89, 1958; 94, 1959;
91, 1961; 92, 1963; 88, 1963; 90, 1965; 95,
1966; 96, 1967 and 93, 1969].
From the point of view of the Mod igliani-
Miller theory of f inance, the repres entation
of the cos t of external f inance in mos t eco-
nometric s tu d ies of inves tment behavior is
s eriou s ly incomplete. Firs t, many economet-
ric s tu d ies employ the rate of interes t on
d ebt as the cos t of capital. The corporate
bond rate is u s ed as a cos t of capital by
Evans , Gru nf eld , Hickman, Mey er and
Glau ber, and Res ek. A nd ers on u s es the
Treas u ry bill rate. The cos t of capital is not
equ al to the corporate bond rate s o long as
equ ity is inclu d ed in the f inancial s tru ctu re
of the f irm.
A mong the s tu d ies we have reviewed , only
the s tu d ies of ind ivid u al f irms by Eis ner,
and by Jorgens on and S iebert, and the
s tu d ies of ind u s try grou ps by Jorgens on and
S tephens on and by Res ek inclu d e meas u res
of the cos t of d ebt and the cos t of equ ity .
S econd ly , only Eis ner, Hickman, Jorgens on
and S iebert, and Jorgens on and S tephens on
have inclu d ed d epreciation with the cos t of
capital in the price of capital s ervices . Only
meas u res of d epreciation by Hickman, Jor-
gens on and S iebert, and Jorgens on-S tephen-
s on are cons is tent with the mortality d is .-
tribu tion f or inves tment good s that u nd er-
lies the corres pond ing meas u res of capital
s tock. Only the Jorgens on-S iebert and Jor-
gens on-S tephens on meas u res take accou nt of
the tax s tru ctu re. The appropriate cos t of
capital is a bef ore-tax rate. Eis ner meas u res
the rate of retu rn on equ ity af ter taxes .
Finally , only the Jorgens on-S iebert meas u re
takes accou nt of capital gains . This com-
pletes ou r evalu ation of the d eterminants of
d es ired capital.
4.3. The time s tru ctu re of the inves tment pro-
ces s
The time s tru ctu re of the inves tment
proces s has been repres ented by f inite, geo-
metric, and rational d is tribu ted lag f u nc-
tions . Finite d is tribu ted lag f u nctions are
employ ed by Eis ner in s tu d y ing ind ivid u al
f irms and by Res ek in s tu d y ing ind u s try
grou ps . Geometric d is tribu ted lag f u nctions
are employ ed withou t mod if ication by Gru n-
f eld and Ku h. The geometric d is tribu ted lag
s cheme employ ed by Koy ck, with the f irs t
weight arbitrary and the remaining weights
d eclining geometrically , has been u s ed by
Bou rneu f and Eis ner in s tu d y ing inves tment
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1135
by ind u s try grou ps . Hickman has u s ed a
s imilar s cheme with the f irs t two weights
arbitrary ; a clos ely related d is tribu ted lag
f u nction is employ ed by A nd ers on. Jorgen-
s on and S iebert and Jorgens on and S tephen-
s on employ rational d is tribu ted lag f u nc-
tions that inclu d e the geometric d is tribu ted
lag f u nctions u s ed by Koy ck and Hickman
as s pecial cas es .
The characterization of average lags in
the inves tment proces s f rom f inite, geo-
metric, and rational d is tribu ted lag f u nctions
can be compared with extens ive s u rvey
s tu d ies of lags between d ecis ions to inves t
and the s tart of cons tru ction, and between
the s tart of cons tru ction and completion
mad e by Thomas May er [83, 1960; 82, 1958
and 84, May er and S onenblu m, 1955].
May er's s u rvey evid ence is bas ed on the
s tu d y of new ind u s trial plants and plant ad -
d itions in the United S tates s tarted in 1954
and 1955. A qu es tionnaire was s ent to in-
d ivid u al companies , requ es ting inf ormation
on lags between d rawing of plans , the f inal
d ecis ion to bu ild , and the placing of the f irs t
s ignif icant ord er to the s tart of cons tru c-
tion
[83].
Very extens ive s tu d ies of the lag
f rom s tart of cons tru ction to completion had
been mad e earlier f rom d ata on complete
plants f rom the period of the Korean War
and World War II; the two s ets of res u lts are
very s imilar [83, p. 130 and 84]. A f requ ency
d is tribu tion of lags in inves tment projects is
given in Table 7. Weighting thes e res u lts by
s ize of project, May er obtains average lags
f rom the d rawing of plans to s tart of con-
s tru ction of s ix months or two qu arters , f rom
placing of f irs t s ignif icant ord er to s tart of
cons tru ction of two months , and f rom s tart
of cons tru ction to completion of 15 months
or f ive qu arters [83, p. 128]. A n u nweighted
mean f or complete plants f rom s tart of con-
s tru ction to completion is 11 months , which
coincid es with the es timate of this lag by
May er and S onenblu m f rom d ata f or the
period of the Korean War [83, p. 132]. The
d if f erence between weighted and u nweighted
TA BLE 7
DIS TRIBUTION OF LA GS IN COMPLETION
OF INVES TMENT PROJECTS
Nu m-
ber Per-
Qu arters of cn
of cent
Plants
Dra.wing of plans 0 8 11
to s tart of con- 1 21 29
s tru ction 2 21 29
3 10 14
4 and over 12 17
Total 72 100
Placing of f irs t 0 42 54
s ignif icant ord er 1 19 25
to s tart of con- 2 12 16
s tru ction 3 and over 4 5
Total 77 100
S tart of con- 2 and u nd er 14 16
s tru ction to com- 3 24 27
pletion 4 33 37
5 5 6
6 6 7
7 and over 8 9
Total 90 100
S ou rce: May er [83, 1960 Table 2, p. 130].
means is explained by a pos itive correlation
between time requ ired f or completion and
s ize of plant [83, p. 128]. May er obtains
a total lag f rom d ecis ion and completion
of s even qu arters [83, p. 128].8
Comparing May er's s u rvey res u lts with
es timates of average lags f rom f inite d is -
tribu ted lag f u nctions , we f ind that Eis ner's
d is tribu ted lag f u nctions f or ind ivid u al f irms
8
R. E. Krainer [75, 1968] cond u cted a d etailed s tu d y
of 25 projects in the au tomobile ind u s try and f ou nd re-
s u lts s imilar to thos e of May er.
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1136 Jou rnal of Economic Literatu re
red u ce to f u nctions of cu rrent and lagged
valu es of prof its and the rate of retu rn. The
res u lting average lags are les s than one y ear
in length, which is incons is tent with f ind ings
f rom s u rvey evid ence. Weights in the d is -
tribu ted lag f u nctions of A nd ers on and Res ek
are partly d etermined f rom regres s ions of in-
ves tment expend itu res on inves tment ap-
propriations . The d is tribu ted lag f u nction
f rom appropriations to inves tment es timated
by A lmon is employ ed with an aid d itional lag
of one qu arter as the d is tribu ted lag f rom in-
ves tment d ecis ions to actu al expend itu res by
Res ek. A nd ers on permits ad d itional lags
f rom the d eterminants of d es ired capital to
expectations and f rom expectations to ap-
propriations . A nd ers on es timates the s u m of
thes e lags to be f ou r qu aCrters in length, con-
trad icting Res ek's implicit as s u mption that
the lag is one qu arter. Ou r conclu s ion is that
the f inite d is tribu ted lag f u nctions employ ed
by Res ek, like thos e of Eis ner, lead to u nd er-
es timates of the average lags u nd erly ing the
inves tment proces s .
May er's s u rvey res u lts may be compared
with Koy ck's es timates of the average lag
f rom a geometric d is tribu ted lag f u nction.
Koy ck's mod el may be repres ented in the
f orm:
ln Kt
= a ln Yt + (1-a- X) ln
Yt-,
+ X In Kt-1,
where Yt is pro(lu ction and Kt is capacity .
Within manu f actu ring, Koy ck's es timates
of average lags are 10.20 y ears f or cement,
29.94 y ears f or open heartlh blas t f u rnaces ,
and 5.26 y ears f or petroleu m ref ining.9 It
s hou ld be noted that Koy ck's pioneering
s tu d y of inves tment was completed bef ore
May er's s u rvey res u lts became available.
A d etailed analy s is of lag s tru ctu res es -
timated f rom mod els clos ely related to
Koy ck's has been carried ou t by Ku h in his
s tu d y of ind ivid u al f irms [76, 1963]. A l-
ternative mod els employ ed by Ku h inclu d e
the f irs t d if f erence mod el,
A A t =
XO-3Kt
+ ( - X) A Kt,
where A t is the level of inves tment, Xt s ales ,
and 6 the rate of replacement, the levels
mod el,
A t = X3Xt + (- X)Kt,
the lagged mod el,
A 1t
=
XXtlX + (5
-X)Kt
and the average mod el,
A t =
Xf 2l(Xt + Xt_1) + (b -
X)Kt.
A verage lags f or each mod el es timated f rom
time s eries are given in Table 8.1"
Ku h's es timates f or time s eries d ata co-
incid e rou ghly with Koy ck's es timates ; both
s ets of res u lts conf lict s harply withl May er's
s u rvey evid ence.11 The conf lict in evid ence
implies that the geometric d is tribu ted lag
f u nction employ ed by Koy ck and by Ku h
is mis -s pecif ied . This argu ment has been
f ormalized by Griliches [44, 1967]. If the
geometric d is tribu ted lag f u nction is applied
where a les s res trictive f orm of d is tribu ted
lag f u nction is appropriate, the omitted
variables have the ef f ect of bias ing the es -
timated averatge lag u pward very s u bs tan-
tially [44, pp.
36-38].
Koy ck's f lexible accelerator mod el of in-
ves tment behavior has been mod if ied by
Hickman to incorporate an ad d itional lagged
term in ou tpu t [57, 1965, pp. 32-41]. The
mod el employ ed by Hickman is :
In Kt
= a In Yt + d ln Yt-1
+ (1 - a - / - X) ln Yt-2
+ X In Kt_1.
Hickman f its this mod el to annu al d ata on
capital s tock K, and real ou tpu t Yt, d ropping
I
The average lags are f or d irect es timates u nd er con-
s tant retu rns to s cale. The d irect es timates are given by
Koy ck [74, 1954, pp. 99, 104, 106].
10
Es timates of the aver age lags are bas ed on the d e-
preciation ad ju s ted capital s tock s lope; the capital s tock
s lopes are es timated f romthe "B-regres s ion" res u lts .
The annu al d epreciation rate u s ed in this ad ju is tment is
.0395 [76, Ku h, 1963, Table 9.1, pp. 294-95, 296].
11
Koy ck's es timates f or manu f actu ring range f rom
20 to 120 qu arters ; Ku h's es timates range f rom16 to
115 qu arters . May er's es timnate is s even qu arters .
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1137
coef f icients in the d is tribu ted lag f u nction
that are not s ignif icant. Es timates of the
parameters of Hickman's mod el au d aver-
age lags d erived f rom thes e parameters are
pres ented in Table 9. The ad d ition of a
third term in real ou tpu t is requ ired f or
f ive of the 13 ind u s try grou ps analy zed by
Hickman. Hickman's es timates of the aver-
age lag are mu ch lower than thos e of Koy ck.
A ll of Hickman's es timates f or manu f ac-
tu ring ind u s tries are below the lowes t of
Koy ck's es timate of 5 y ears f or petroleu m
ref ining. A lthou gh Hickman's es timates ap-
pear to be s omewhat higher than the average
lags s u gges ted by May er's s u rvey evid ence,
the bias is red u ced very s u bs tantially rela-
tive to the es timates of Koy ck and Ku h.
Ou r conclu s ion is that the mod if ied geo-
metric d is tribu ted lag f u nctions employ ed
by Hickman provid e an ad equ ate repre-
s entation of the inves tment proces s , bu t that
the geometric d is tribu ted lag f u nctions u s ed
by Koy ck and Ku h d o not.
Mey er and Glau ber employ a lag s cheme
with weights alternately zero and d eclining
geometrically . This pattern of weights ap-
pears to be highly implau s ible. Evans em-
ploy s a lag s cheme with geometrically d e-
clining weights f or both d epend ent and in-
d epend ent variables . The rate at which
weights d ecline is the s ame f or both s ets of
variables . This pattern of weights als o ap-
pears to be implau s ible.
To complete ou r evalu ation of alternative
characterizations of the time s tru ctu re of the
inves tment proces s , we cons id er es timates of
average lags f rom rational d is tribu ted lag
f u nctions by Jorgens on and S iebert f or an-
nu al d ata on inves tment by ind ivid u al f irms
and by Jorgens on and S tephens on f or qu ar-
terly d ata f or ind u s try grou ps . Jorgens on
and S iebert s elect the bes t-f itting lag d is -
tribu tion f rom rational d is tribu ted lag f u nc-
tions of the f orm:
A Kt
=
-y oA K+t +
'y ,A K+t-l
+ 72A K+t-3
-
wjA Kt_j_ W2A Kt-2y
TA BLE 8
A VERA GE LA GS FOR S IXTY MA NUFA CTURING
FIRMS , ES TIMA TED BY KUH
c. A verage
Mod el a. X-& b. X Lag
(Years )
Firs t d if f erence . 1638 .2033 3.92
Levels .0010 .0405 23.69
Lagged - .0040 .0355 28.17
A verage .0150 .0545 17.85
S ou rce: Ku h [76, 1963, Table 9.1,
pp.
294-95].
where:
TO + 71 + 72 = 1 -i- W2.
A verage lags es timated f or 1949-63 and f or
1937-41, 1949-63 f or the Neoclas s ical I
mod el are given in Table 10 [65, 1968, p.
1145]. Jorgens on and S tephens on s elect the
bes t-f itting lag d is tribu tion f rom f u nctions
of the f orm:
7
A Kt
=
E
y ,A K+t-
-
wjA Kt-l-
2A Kt-2-
r=2
where:
7
Ey T
1+ Wl + C2.
r=2
A verage lags es timated f or the period 1949,
f irs t qu arter to 1960, f ou rth qu arter, are
given in Table 11 [68, 1967, pp. 21-22].
The res u lts of Jorgens on and S tephens on
f or ind u s try grou ps are s imilar to thos e of
Hickman; both s ets of es timates are s omewhat
higher than May er's s u rvey es timate. The
res u lts of Jorgens on and S iebert f or ind i-
vid u al f irms vary more wid ely than res u lts
f or ind u s try grou ps . On the whole their es -
timates of average lags f or ind ivid u al f irms
are lower than es timates f or ind u s try grou ps
and agree more clos ely with May er's s u rvey
res u lts . Ou r overall conclu s ion is that the
rational d is tribu ted lag f u nctions employ ed
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1138 Jou rnal of Economic Literatu re
TA BLE 9
A VERA GE LA GS FOR THIRTEEN Two-DIGIT INDUS TRIES ,
U. S . MA NUFA CTURING, ES TIMA TED BY HICKMA N
d . A ver-
Ind u s try Grou p a. U_ b. / c. I t- age Lag
3-2 (Years )
Primary metals .1297 .2383 .1110 2.05
Machinery .1508 .0975 3.42
Motor vehicles .1132 .1859 2.96
Trans portation
equ ipment .2715 .0369 .3232 1.67
S tone, clay , and glas s .1837 .0663 .0012 3.25
Other d u rables .2597 .1224 1.94
Food and beverages .0029 .3343 2.96
Textiles .1577 .1832 .0278 2.36
Paper .1685 .2321 2.08
Chemicals .1317 .3477 .1826 1.59
Petroleu m .1503 .2639 2.05
Ru bber .2085 .2342 1.79
Other nond u rables .0816 .2488 2.78
S ou rce: Hickman [57, 1965, Tables 4 and 5, pp.
54-561.
by Hickman and by Jorgens on and S iebert
f or annu al d ata and by Jorgens on and
S tephens on f or qu arterly d ata provid e
s atis f actory repres entations of the time
s tru ctu re of the inves tment proces s . In
thes e s tu d ies the ty pical s hape of the lag
d is tribu tion is f irs t ris ing and then f alling;
in the geometric lag d is tribu tion the lag
coef f icients are alway s f alling. This may help
to accou nt f or the pronou nced d if f erence in
empirical res u lts f or s tu d ies bas ed on the
geometric d is tribu tion and s tu d ies bas ed on
generalizations of this d is tribu tion. This
completes ou r evalu ation of alternative
repres entations of the time s tru ctu re.
4.4 Replacement inves tment
Except f or Evans ' s tu d y of inves tment by
ind u s try grou ps , s tu d ies that inclu d e replace-
ment inves tment explicitly employ the geo-
metric mortality d is tribu tion f or inves tment
good s . Eis ner, Gru nf eld , Jorgens on and
S iebert, and Ku h employ this d is tribu tion in
the s tu d y of inves tment by ind ivid u al f irms .
Bou rneu f , Eis ner, Hickman, Jorgens on and
S tephens on, and Res ek employ this d is -
tribu tion in the s tu d y of inves tment by in-
d u s try grou ps . Bou rneu f , like Chenery and
Koy ck, employ s capacity as a meas u re of
capital s tock. Implicitly , Bou rneu f as s u mes
that the capital-capacity ratio is cons tant.
The s tu d ies of A nd ers on and Mey er and
Glau ber d o not inclu d e replacement inves t-
ment.
The geometric mortality d is tribu tion im-
plies that replacement is proportional to
capital s tock. It als o implies that capital
s tock is a weighted s u m of pas t gros s inves t-
ments with geometrically d eclining weights .
TA BLE 10
A VERA GE LA GS FOR FIFTEEN U. S .
MA NUFA CTURING FIRMS ES TIMA TED
BY JORGENS ON A ND S IEBERT
A verage
Lag
(Years )
Firm
1937-41,
1949-63 1949-63
General Motors 1.01 2.17
Good y ear .32 .63
A merican Can 3.15 2.74
Pitts bu rgh Plate Glas s 1.49 2.06
U. S . S teel 1.61 1.18
General Electric 1.61 1.55
Rey nold s Tobacco 2.12 2.62
Du Pont 1.00 1.00
A nacond a 1.80 1.42
S tand ard Oil, N. J. .83 .50
International Paper .45 1.44
Wes tinghou s e A ir Brake .37 .68
International Bu s ines s
Machines .48 .47
S wif t 1.09 1.51
Wes tinghou s e Electric 2.37 2.64
S ou rce: 1949-63: Jorgens on and S iebert,
[65, 1968, Table 6, p. 1145].
1937-41, 1949-63: S iebert, pers onal com-
mu nication.
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1139
A n internally cons is tent mod el of replace-
ment inves tment bas ed on the proportional-
ity of replacement and capital s tock requ ires
a meas u re of capital s tock that employ s the
geometric mortality d is tribu tion [57, Hick-
man, 1965; 59, Jorgens on, 1963; 60, Jorgen-
s on, 1965]. The s tu d ies of ind u s try grou ps
by Eis ner, Hickman, Jorgens on and S tephen-
s on, and Res ek and the s tu d y of ind ivid u al
f irms by Jorgens on and S iebert are internally
cons is tent and employ an appropriate mea-
s u re of capital s tock.'2
In the s tu d y of inves tment by ind ivid u al
f irms , Eis ner and Ku h as s u me that replace-
ment is proportional to gros s capital s tock,
an u nweighted s u m of pas t gros s inves tments
net of retirements . This as s u mption is in-
cons is tent with a geometric mortality d is -
tribu tion f or capital good s . Eis ner makes
no attempt to revalu e acqu is itions and re-
tirements f or changes in the price of ac-
qu is ition of inves tment good s . Ku h revalu es
both acqu is itions and retirements .
Gru nf eld as s u mes that replacement is
proportional to net capital s tock, gros s
capital s tock les s accu mu lated d epreciation.
Both acqu is itions of inves tment good s and
d epreciation are revalu ed to correct f or
changes in the price of acqu is ition of inves t-
ment good s . A ccou nting d epreciation d u ring
the period cons id ered by Gru nf eld is bas ed on
the s traight line method rather than the d e-
clining balance method implied by the geo-
metric mortality d is tribu tion f or inves tment
good s .
Evans ' s tu d y employ s the as s u mption that
replacement inves tment is proportional to
the average of capital s tock held f ive and s ix
qu arters earlier. This as s u mption is not
tes ted . Capital s tock is meas u red as net
capital s tock, which is incons is tent with the
mortality d is tribu tion f or inves tment good s
employ ed in Evans ' mod el of replacement
inves tment. Net capital s tock in each period
TA BLE 11
A VERA GE LA GS FOR FIFTEEN Two-DIGIT
INDUS TRIES , U. S . MA NUFA CTURING,
ES TIMA TED BY JORGENS ON
A ND S TEPHENS ON
A verage Lag
Ind u s try Grou p (Years )
Primary metals 2.27
Primary nonf errou s metals 2.06
Electrical machinery 1.76
Non-electrical machinery 1.77
Motor vehicles 2.68
Nonau tomotive
2.20
S tone, clay , and glas s 1.95
Other d u rables 1.69
Food and beverages 2.19
Textiles 2.06
Paper
2.82
Chemicals
1.77
Petroleu m
1.93
Ru bber
1.50
Other nond u rables 1.50
S ou rce: Jorgens on and S tephens on [68,
1967; Table 2, pp. 21-22].
is d ef lated by the inves tment good s price
ind ex. Evans , like Eis ner, d oes not attempt
to correct acqu is itions of inves tment good s
f or pas t changes in the price of acqu is ition.
A lthou gh the geometric mortality d is tribu -
tion is commonly employ ed in the es timation
of replacement requ irements , relatively little
d irect evid ence is available on the valid ity of
this d is tribu tion. Mey er and Ku h have
s tu d ied the "echo ef f ect" in analy zing d ata
f or ind ivid u al f irms [86, 1957, pp. 91-100].
A n extreme f orm of the "echo ef f ect" is as -
s ociated with a period ic mortality d is tribu -
tion, res u lting in a period ic d is tribu tion of
replacements and period ic cy cles of replace-
ment inves tment [39, Feller, 1957, pp. 290-
93]. A weaker f orm of the echo ef f ect is as s o-
ciated with relatively high valu es of the re-
12
Eis ner and Res ek u s e the capital s tock d ata of
Jorgens on and S tephens on. Hickman employ s his own
es timates .
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1140 Jou rnal of Economic Literatu re
placement d is tribu tion at particu lar ages .
This is the f orm of the echo ef f ect tes ted by
Mey er and Ku h. The age of a f irm's capital
equ ipment is meas u red by accu mu lated d e-
preciation res erves d ivid ed by gros s f ixed as -
s ets at the beginning of the period . Firms are
d ivid ed into 15 ind u s try grou ps within manu -
f actu ring, corres pond ing rou ghly to two-
d igit ind u s tries [86, 1957, pp. 9209-392]. The
d epend ent variable is gros s inves tment d i-
vid ed by gros s f ixed as s ets on the grou nd s
". . . that s ince replacement inves tment is
inclu d ed in gros s inves tment the net impact
of the echo ef f ect s hou ld be as certainable
even when u s ing gros s inves tment as the d e-
pend ent variable-althou gh perhaps not as
precis ely as wou ld be d es irable" [86, p. 93].
Mey er and Ku h employ a prof it mod el and
a s ales mod el to explain gros s inves tment. In
regres s ions f or averages of annu al d ata over
the period 1946-50, the age variable is s ig-
nif icant in both mod els f or only one ind u s try
grou p-Vehicles and S u ppliers ; age is s ig-
nif icantly negative f or this ind u s try , s u g-
ges ting high rates of replacement f or low
ages of capital good s [86, pp. 9255-56]. For
other ind u s try grou ps the age variable is
both pos itive and negative with s mall nega-
tive valu es pred ominating. A ge is s ignif -
icantly negative f or Light Chemicals in the
s ales mod el bu t not in the prof its mod el. The
proportion of s ignif icant res u lts -3 ou t
of 30 regres s ions -is not ou t of line with the
nu ll hy pothes is that the echo ef f ect play s no
role in the d etermination of inves tment f or
ind ivid u al f irms .
M. S . Feld s tein and D. K. Foot have at-
tempted to cons tru ct a mod el of replacement
inves tment bas ed on es timates of replace.
ment inves tment f rom the McGraw-Hill
S u rvey and es timates of capital s tock f rom
the Department of Commerce [38, 1971].
The capital s tock es timates imply s eparate
es timates of replacement inves tment, s o the
two bod ies of d ata employ ed by Feld s tein
and Foot are mu tu ally incons is tent. They
as s u me that replacement as a proportion of
gros s capital s tock d epend s on variables s u ch
as cas h f low and capacity u tilization. The
hy pothes is that the replacement rate d e-
pend s on cas h f low or capacity u tilization is
incons is tent with the perpetu al inventory
method u s ed by the Department of Com-
merce in es timating capital s tock.
Feld s tein and Foot attempt to tes t the
hy pothes is that the replacement rate is con-
s tant. This hy pothes is wou ld be tru e only if
the replacement rate is calcu lated as the
ratio of replacement inves tment to capital
s tock, and only if capital s tock is es timated
by the d eclining balance method . Und er
thes e circu ms tances the tes t propos ed by
Feld s tein and Foot is s u perf lu ou s s ince the
average replacement rate is cons tant by
d ef inition. We conclu d e that Feld s tein and
Foot have not s u cces s f u lly avoid ed the
neces s ity f or d irect obs ervation of both re-
placement inves tment and capital s tock in a
tes t of the mod el of replacement they pro-
pos e. Perpetu al inventory es timates of cap-
ital s tock s u ch as the es timates of the De-
partment of Commerce cannot be employ ed
in s u ch a tes t.
A n alternative approach to the empirical
s tu d y of mortality d is tribu tions is throu gh
the analy s is of u s ed equ ipment prices . Data
on u s ed equ ipment prices are limited to
read ily movable as s ets . A s tu d y of price d ata
f or f arm tractors is reported by Griliches [43,
1960] and s tu d ies of price d ata f or au to-
mobiles are pres ented by P. Cagan [12, 1965]
and F. Wy kof f [107,1970]. A mu ch more in-
tens ive s tu d y of price d ata f or pick-u p
tru cks is given by Hall [50, 1971]. Us ed
equ ipment prices , like prices f or acqu is ition
of new equ ipment, are equ al to the s u m of
f u tu re rental prices weighted by the relative
ef f iciency of the capital good over its remain-
ing lif etime. For geometric d ecline in ef f i-
ciency the acqu is ition prices d ecline geomet-
rically with age. We now review the evi-
d ence on d ecline in relative ef f iciency f rom
d ata on u s ed equ ipment prices .
S tu d ies of prices of acqu is ition of new and
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1141
u s ed capital good s reveal a s harp d rop be-
tween the price of new equ ipment and the
price of u s ed equ ipment. The obviou s ex-
planation is that prices of new equ ipment
are "lis t" prices paid by relatively f ew pu r-
chas ers . The actu al prices paid vary over a
mod el y ear, d eclining as a new mod el y ear
approaches ; this variation is omitted f rom
the obs erved lis t prices . The prices of u s ed
equ ipment are bas ed on actu al trans actions
and vary over the y ear [43, 1960, p. 198].
From an examination of prices of u s ed f arm
tractors , ages one to 13, f or ten d if f erent
points of time d u ring the y ears 1937-58,
Griliches conclu d es : "The d ata point to a d e-
clining balance [geometric] d epreciation
mod el, with a rate s omewhat higher in the
1930's than in the 1950's " [43, p. 198].
Wy kof f 's f ind ings f or u s ed au tomobiles , ages
one to s even, f or f ive d if f erent points of time
d u ring the y ears 1950-68, are s imilar [107,
1970, pp. 171-792]: "A f ter the f irs t y ear cars
d o appear to d ecay exponentially [geometri-
cally ] ." Cagan als o f ind s that geometric d e-
preciation provid es a s atis f actory approxi-
mation [12, 1965, pp. 92925-926].
Hall s tu d ied d ata f or s econd -hand pick-u p
tru cks , ages one to s ix, f or the y ears 1961-67.
He conclu d es [50, 1971] that: ". . . the geo-
metric [mortality d is tribu tion] f u nction is
probably a reas onable approximation f or
many pu rpos es . Certainly , there are no
grou nd s f or believing that any very s eriou s
error has been comitted by u s ing a geometric
d eterioration f u nction in calcu lating capital
s tock." We conclu d e that Hall's s tu d y of the
mortality d is tribu tion f or pick-u p tru cks
s u pports the conclu s ions of Cagan, Griliches ,
and Wy kof f f or au tomobiles and f arm trac-
tors . The geometric mortality d is tribu tion
explains the behavior of u s ed equ ipment
prices f or all three ty pes of capital good s .
The empirical evid ence f rom s tu d ies of
equ ipment prices s u pports the f ind ings of
Mey er and Ku h f rom an analy s is of replace-
ment requ irements . This completes ou r eval-
u ation of mod els of replacement inves tment.
4.5. Conclu s ion
The point of d epartu re f or the large bod y
of empirical res earch on inves tment behavior
d u ring the pas t d ecad e has been the f lexible
accelerator mod el of Chenery and Koy ck.
This mod el has been grad u ally mod if ied and
extend ed u nd er the impact of new empirical
f ind ings , bu t its bas ic ou tlines have f ou nd
s u bs tantial empirical s u pport. Des ired cap-
ital is d etermined by long-ru n cons id era-
tions ; changes in d es ired capital are trans -
lated into inves tment expend itu res by a d is -
tribu ted lag f u nction. This mod el provid es
an explanation of net inves tment in all of the
empirical s tu d ies we have reviewed .
A lternative mod els of inves tment behavior
d if f er s u bs tantially in the d eterminants of
d es ired capital. The empirical evid ence now
available provid es a means of d is criminating
among competing hy pothes es on the bas is of
their perf ormance. Firs t, real ou tpu t emerges
as the mos t important s ingle d eterminant of
inves tment expend itu res . Cons id ered as a
competing mod el of inves tment, the prof its
or liqu id ity mod el of Tinbergen and Klein is
d ef initely inf erior. A s econd important d e-
terminant of inves tment is the availability
of f inance. The introd u ction of f inancial con-
s id erations with variations in ou tpu t neces -
s itates s u bs tantial mod if ication of the f lexible
accelerator mod el of Chenery and Koy ck.
Financial cons id erations can be introd u ced
into a mod el of inves tment expend itu res in
two f orms : internal f u nd s or liqu id ity and
external f u nd s or the cos t of capital. Thes e
two alternative f ormu lations are as s ociated
with the theories of f inance of Du es enberry
and Mey er and Ku h and of Mod igliani and
Miller, res pectively . The evid ence clearly
f avors the Mod igliani-Miller theory . Internal
liqu id ity is not an important d eterminant of
inves tment, given the level of ou tpu t and the
cos t of external f u nd s .
A s econd extens ion of the f lexible accelera-
tor mod el neces s itated by empirical evid ence
is the incorporation of replacement requ ire-
ments . A mod el of replacement inves tment
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1142 Jou rnal of Economic Literatu re
bas ed on the geometric mortality d is tribu -
tion is u s ed in all empirical s tu d ies that in-
corporate replacement explicitly . This mod el
has important implications f or the meas u re-
ment of capital s tock and the as s ociated
rental price. Capital s tock is meas u red in a
way that is incons is tent with the geometric
mortality d is tribu tion in many of the s tu d ies
of inves tment we have reviewed .
The d u rable good s mod el is characterized
by price-qu antity d u ality . This d u ality pro-
vid es a means of integrating f inancial and
real d eterminants of d es ired capital into a
mod el of prod u cer behavior. The implica-
tions of the d u rable good s mod el f or meas u re-
ment of the price of capital s ervices have
been d eveloped only recently . In all bu t a
f ew s tu d ies we have reviewed , the cos t of
capital s ervices is meas u red in a way that
f ails to ref lect the u nd erly ing d u rable good s
mod el. The price s id e of the d u rable good s
mod el has been extend ed recently to in-
corporate d etails of the tax s tru ctu re, pro-
vid ing a d irect link between economic policy
and the d eterminants of inves tment ex-
pend itu res [7a, 1971, pp. 15, 51-53].
Given the valid ity of the mod el f or d u rable
capital good s that u nd erlies aggregate cap-
ital s tock, a s u bs id iary problem is the valid -
ity of the geometric mortality d is tribu tion.
Direct tes ts of the corres pond ing mod els of
replacement requ irements and capital good s
prices s u pport the geometric d is tribu tion. A
tes t of the valid ity of the d u rable-good s
mod el its elf wou ld requ ire a well d ef ined
alternative theory of replacement that d oes
not employ an aggregate meas u re of capital.
A corres pond ing theory of the cos t of the u s e
of d u rable equ ipment wou ld als o be requ ired .
Chenery and Koy ck employ ed the geo-
metric d is tribu ted lag f u nction in repres ent-
ing the time s tru ctu re of the inves tment
proces s . The empirical evid ence we have re-
viewed s u gges ts that the res u lting es timates
of average lags are bias ed u pward very s u b-
s tantially . Rational d is tribu ted lag f u nc-
tions employ ed by A nd ers on, Hickman, Jor-
gens on and S iebert, and Jorgens on and
S tephens on prod u ce es timates of the average
lags cons is tent with s u rvey evid ence on the
lag s tru ctu re; f or manu f actu ring, the average
lag between the d eterminants of inves tment
and actu al expend itu res is f rom one and a
half to two y ears . The average lag varies
among ind u s tries and among f irms and , of
cou rs e, among projects within a f irm.
In the s tu d y of inves tment behavior the
mos t important cu rrent problem is the in-
tegration of the time s tru ctu re of the inves t-
ment proces s into the repres entation of
technology . Mod els retaining the d u rable
good s mod el of capital and au gmenting the
prod u ction f u nction with internal ad ju s t-
ment cos ts have been propos ed by Lu cas
[81,
1967],
Uzawa [106,
1969],
and Tread -
way [105, 1969]. Thes e mod els of technology
may be approximated by d is tribu ted lag in-
ves tment f u nctions . A n important s econd ary
problem is the time s tru ctu re of f inancial d e-
terminants of inves tment; Bis chof f [7a] has
s u gges ted that real ou tpu t and the cos t of
capital s hou ld have s eparate lag s tru ctu res in
the d etermination of inves tment expen-
d itu res .
A t a more bas ic level the mos t important
open qu es tion in the s tu d y of inves tment is
the integration of u ncertainty into the theory
and econometrics of inves tment. The Mod ig-
liani-Miller theory of f inance u nd erlving
recent s tu d ies of inves tment alread y incorpo-
rates s ome as pects of u ncertainty . A more
thorou ghgoing integration wou ld requ ire the
s imu ltaneou s d etermination of prod u ction,
i nves tment, f inancial policy , and s ecu rity
prices . This ambitiou s goal appears to be well
within the range of exis ting economic theory
and econometric techniqu e.
In the pas t d ecad e the econometric s tu d y
of inves tment behavior has d eveloped f rom
empirical comparis ons of alternative d eter-
minants to increas ingly explicit theories of
prod u cer behavior. Inves tment res earch has
been an important area f or the d evelopment
and tes ting of new mod els of prod u ction and
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Jorgens on: Economic S tu d ies of Inves tment Behavior 1143
f inance. It has been the principal area f or the
d evelopment of new econometric techniqu es
f or repres entation of the time s tru ctu re of
economic behavior. The implications of the
new approach to the s tu d y of inves tment are
f ar f rom exhau s ted .
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