Semi-Parametric Modeling of Investments in Energy Installations

This paper applies a semi-parametric approach to estimating a generalised model of investments in energy installations. The model accounts for irreversibility and lumpiness of investments by linking a parametric specification of the unobservable dynamic shadow price to observed investment behaviour using a non-parametric specification of the adjustment cost function. The results suggest that marginal costs of investments in energy installations increase quickly at small investment levels, whereas the increase slows down at higher investment levels. Therefore, standard parametric adjustment cost models are likely biased such that they over-estimate small investments and under-estimate large investments.