Persistence of Capacity Shortage and the Role of Adjustment Costs

This paper finds that plant capital constraints on output in UK industry tend to persist for surprisingly long periods, reflecting a slow response of capital investment. The paper examines the conventional view that this response pattern may be explained by cost of adjustment. Using UK time‐series data for a small number of industry groups, it is shown that the observed dynamics of capital constraints (capital shortage) are not fully explained by a quadratic adjustment cost model or by alternative forms of adjustment cost.