Essays on the microeconomic foundations of aggregate investment

This dissertation examines the microeconomic foundations of aggregate fixed capital investment by focusing on the literature based on models with non-convex adjustment costs.;Chapter 2 investigates the empirical effectiveness of this literature by comparing it to the neoclassical investment literature based on convex adjustment costs at the firm level. Four empirical fundamentals are the basis of this comparison: profitability shocks, the mandated investment rate, "Fundamental Q," and Tobin's q. A unified framework is constructed to analyze the performance of the fundamentals as structural estimates of investment, the nature of capital adjustment costs supported by the relationship between the investment rate and the fundamentals, and the robustness of the empirical results to changes in the calibrated parameters and to changes in firm characteristics. The results show that the investment pattern is non-linear and asymmetric. But neither convex nor non-convex adjustment costs can explain the investment pattern successfully by themselves. The mandated investment rate and profitability shocks are the most significant determinants of investment. The results are robust to changes in the calibrated parameters, but sensitive to firm characteristics.;Chapter 3 focuses on how successful financial variables are in explaining investment when investment opportunities are controlled for by profitability shocks and the mandated investment rate instead of Tobin's q. The results show that financial variables are still significant determinants of investment. However, their explanatory power for investment is lower.;In Chapter 4, a model with both convex and non-convex capital adjustment costs is improved by incorporating financial characteristics of firms into their investment decision process. The structural parameters are solved by the indirect inference method reproducing the coefficients of a reduced form investment equation where profitability shocks and the cash-flow-to-capital ratio are independent variables. The findings show that the mixed model is more successful in reproducing the coefficients of the investment equation compared to the alternative models in the investment literature. While financially unconstrained firms follow fundamentals more closely in their investment decisions, investment of financially constrained firms is highly affected by changes in their internal funds.