Essays in Memory of Albert Ando
Edited by Lawrence R. Klein
Chapter 12: Land Prices and Business Fixed Investment in Japan
12. Land prices and business ﬁxed investment in Japan* Nobuhiro Kiyotaki and Kenneth D. West 1. INTRODUCTION Japan has seen episodes in which boom and bust in land prices have been accompanied by boom and bust in business ﬁxed investment. This occurred in the late 1980s and the early 1970s. In this chapter we formally model the link between movements in land prices and in business investment, and use regressions to quantify the importance of the link. In the end, however, our estimates attribute relatively little of the movement in business ﬁxed investment to movements in land prices. Our model attempts to formalize the following intuition: when land prices rise due to (say) an increase in aggregate productivity, individual price-taking ﬁrms will try to economize on land by building taller structures and using more compact capital equipment. That is, all things equal, a rise in land prices will cause ﬁrms to shift towards technologies with higher ratios of capital to land. While our focus is on the behavior of a representative price-taking ﬁrm, we note that a similar shift may hold in the aggregate: in a class of growth models, an increase in aggregate productivity causes an increase in the aggregate capital–output ratio when the elasticity of substitution between capital and land is larger than one. That is, a rise in productivity will encourage business ﬁxed investment above and beyond the usual direct eﬀects through the cost of capital and output. A fall in aggregate productivity will have...
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