“Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application” by Russell COOPER
University of Texas at Austin and NBER
University of Maryland
Jonathan L. WILLIS
Federal Reserve Bank of Kansas City
This paper studies capital adjustment costs at the establishment level. Our goal here is to characterize these adjustment costs, which are important for understanding both the dynamics of aggregate investment and the impact of various policies on capital accumulation. Our estimation strategy searches for parameters that minimize ex post errors in an Euler equation. This strategy is quite common in models for which adjustment occurs in consecutive periods. Here, we extend that logic to the estimation of parameters of dynamic optimization problems in which non-convexities lead to extended periods of investment inactivity. This methodology allows us to take the structural model directly to the data, avoiding simulation-based methods that rely on user-designated moments. To demonstrate the effectiveness of this methodology, we first undertake several Monte Carlo exercises using data generated by the structural model. We then estimate capital adjustment costs for U.S. manufacturing establishments in two sectors.