COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 736 "Capital Utilization and Capital Accumulation: Theory and Evidence" Matthew D. Shapiro January 1985 A firm may acquire additional capital input by purchasing new capital or by increasing
the utilization of its current capital. The margin between capita accumulation and capital
utilization is studied in a model of dynamic factor demand where the firm chooses capital,
labor, and their rates of utilization. A direct measure of capital utilization -- the work
week of capital -- is incorporated into the theory and estimates. The methodology
advocated by Hansen and Singleton (1982) is used to obtain estimates of the model’s
parameters. This methodology allows the firm’s decision problem to depend on expected
values of future endogenous and exogenous functional form or the distribution of shocks to
the system. The estimates imply that capital stock is costly to adjust while the work week
of capital is essentially costless to adjust. Hence, the work week of capital overshoots
the steady state when innovations in policy or other shocks change the demand for capital.
Short run variation in the demand for capital is met by changing utilization. Long run
variation is met by changing the stock. The estimated response of the capital stock to
changes in its price and in the required rate of return is substantial and it takes place
more quickly than found in other estimates. These results provide an important challenge
to the view that input prices and required rates of return are empirically unimportant in
models of the demand for capital. |
