This paper examines the relationship between productivity, investment, and plant age for over 14,000 plants in the U.S. manufacturing sector for the period of 1972 to 1988. Productivity patterns vary significantly due to plant heterogeneity. Initially productivity increases with respect to plant age, but then it decreases. Productivity and growth in productivity are found to be systematically correlated with plant size and industry. However, there is virtually no observable relationship between investment and productivity or productivity growth. Overall the results indicate that plant heterogeneity and fixed effects are more important determinants of observable productivity patterns than sunk costs or capital reallocation.

This paper explores investment fluctuations due to discrete changes in a plant's capital stock. The resulting aggregate investment dynamics are surprisingly rich, reflecting the interaction between a replacement cycle, the cross-sectional distribution of the age of the capital stock, and an aggregate shock. Using plant-level data, lumpy investment is procyclical and more likely for older capital. Further, the predicted path of aggregate investment that neglects vintage effects tracks actual aggregate investment reasonably well. However, ignoring fluctuations in the cross-sectional distribution of investment vintages can yield predictable nontrivial errors in forecasting changes in aggregate investment. (JEL E22, E32)