Specification of the Technology for Neoclassical Investment Theory : Testing the Adjustment Costs Approach

The paper provides an empirical investigation into the nature of adjustment costs and their implications for modelling and investment process. In particular, their role in today's most popular models of investment, the rational flexible accelerator and Tobin's q, is considered. In the analysis it is assumed that costs of adjusting the level of quasi-fixed inputs affects the firm's operations independently of specific optimal decision rules for investment. The results show that the pattern of adjustment costs is consistent with the solution of the optimization problem faced by the firm. However, such structure is more complex than what is usually postulated in the literature. Finally costs of adjustment represent a significant portion of the unit cost of new capital goods.