Tobin's Q, economic rents, and the optimal stock of capital

Richard W. Kopcke

No 92-3, Working Papers from Federal Reserve Bank of Boston

Abstract: The correspondence between the demand for capital and various measures of Tobin?s q often is tenuous (Abel and Blanchard 1986; Hayashi 1982), at times even perverse. Among the possible explanations for this apparent challenge to the q theory of investment, this paper considers the consequences of allowing the return on capita] to vary with the scale of production. When enterprises earn economic rents on inframarginal investments, the q theory of investment does not claim that changes in the optimal stock of capital must correspond consistently to changes in marginal q.

Keywords: Capital (search for similar items in EconPapers)
Date: 1992
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