Estimating Empirical Marginal Adjustment Cost Function - A Power Series Approach

Using insights obtained from Newey’s (1994) series estimator and a novel restatement of the q-theory that additively separates the marginal adjustment cost term in the canonical model, I model and estimate the shape of the marginal adjustment cost function. I discuss the issues in specification and identification in details, focusing particularly on the misspecification due to the q-ratio being an insufficient statistic for determining investment. The function recovered from Indian 2013 WBES data is able to explain both lumpy and serially correlated investment