This chapter attempts to give a structural interpretation to the distributed lag of sales on investment at the two–digit level in U.S. manufacturing. It first presents a simple model that captures the various sources of lags and their respective implications. It then estimates the model using both data on investment and sales as well as direct information on the sources of lags. The spirit of the chapter is exploratory; the model is used mainly as a vehicle to construct, present, and interpret the data.

Lags in the response of investment expenditures to sales can be attributed to four main sources. The first is expectations. Investment depends on future sales, which themselves depend on current and past sales. The next two come from technology. One, costs of adjustment, is internal to the firm. The other, delivery lags, is external to the firm. Together they imply that the firm is neither willing nor able to adjust its capital stock completely and instantaneously to movements in sales. The last source is financial. Although the theory describes investment orders, data are about investment expenditures, which are related to orders by a distributed lag. Section 1 presents a model that incorporates these four sources explicitly and shows their respective implications.

Section 2 presents the basic investment and sales characteristics for 13 industries. It estimates a reduced–form relation of investment on sales and the capital stock, showing common patterns and differences across industries.