Non-convexities in the Adjustment of Different Capital Inputs: A Firm Level Investigation

Abstract: Recent developments in investment research have highlighted the importance
of non-convexities and irreversibilities in the firms' adjustment of quasi-fixed inputs.
Aggregation across capital goods may smooth out the discontinuities associated with the
adjustment of individual assets. Lack of suitable data is one of the reasons why empirical
work has typically relied on the assumption of capital homogeneity. In this paper we
exploit a data set of 1539 Italian firms which allows us to disaggregate capital into
equipment and structures, and purchases and sales of assets. We construct measures of
fundamental Q to capture investment opportunities associated with each asset. We
uncover the pattern of dynamic adjustment by using non-parametric techniques to relate
each individual investment to own fundamental Q.