Quantifying UK Capital Adjustment Costs

In: Economica, Volume 75, Issue 298, p. 310-325

Abstract

This paper estimates UK capital adjustment costs, using manufacturing and service industry data for 1970–2000. There is evidence of significant adjustment costs, with a 1% increase in investment reducing value added by 0.05%. This implies an elasticity of investment with respect to Tobin's q of 2.5, and a convergence time for capital of 12 years. The results suggest that adjustment costs may have caused half of the slowdown in UK total factor productivity (TFP) growth during the second half of the 1990s. The impact is larger than that reported for the United States, reflecting larger adjustment costs and higher investment growth.