Essays on investment and adverse selection

Relative used capital price, the measure of irreversibility, is fixed in almost all the investment literature. This dissertation introduces investment models with state-dependent irreversibility and tests whether these models outperform fixed irreversibility cases, at both the macro and micro levels. Since there is currently no historical data available on the issue of used capital prices, the first chapter uses an indirect inference procedure to estimate the cyclical property of irreversibility at the micro-level. In the second chapter, I propose a dynamic investment model with endogenous irreversibility arising from the lemons problem in the used capital market and examine the cyclical implication of irreversibility. Data evidence shows that capital reallocation, or used capital expenditure, is pro-cyclical. In a general equilibrium framework, the third chapter reveals that the investment model with state-dependent irreversibility explains this phenomenon while the model with fixed irreversibility does not.