The irreversibilitypremium

When investmentisirreversible,theorysuggeststhatfirmswillbe‘‘reluctanttoinvest.’’ This reluctancecreatesawedgebetweenthediscountrateguidinginvestmentdecisions and thestandardJorgensonianusercost(adjustedforrisk).Weusetheintertemporal tradeoff betweenbenefitsandcostsofchangingthecapitalstocktoestimatethiswedge, whichwelabeltheirreversibilitypremium.Estimatesarebasedonpaneldataforthe period1980–2001.Thelargedatasetallowsustoestimatetheeffectsoflimitedresale markets,lowdepreciationrates,highuncertainty,andnegativeindustry-wideshockson theirreversibilitypremium.Ourestimatesprovideareadilyinterpretablemeasureof theimportanceofirreversibilityanddocumentthattheirreversibilitypremiumisboth economicallyandstatisticallysignificant