Tobin’s q and Investment in a Model with Multiple Steady States

Mika Kato, Willi Semmler and Marvin Ofori
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Mika Kato: Howard University
Marvin Ofori: University of Bielefeld

Chapter 4. in Time and Space in Economics, 2007, pp 55-80 from Springer

Abstract: Summary This chapter considers a simple dynamic investment decision problem of a firm where adjustment costs have capital size effects. This type of setting possibly results in multiple steady states, thresholds, and a discontinuous policy function. We study the global dynamic properties of the model by employing the Hamilton-Jacobi-Bellman method and dynamic programming that help us in the numerical detection of multiple steady states and thresholds. We also explore the model’s implications concerning the effects of aggregate demand, interest rates, and tax rates. Finally, an empirical study on the firm size distribution is provided using US firm-size data. We utilize two different approaches, Kernel density estimation and Markov chain transition matrix, to study an ergodic distribution. Our results suggest a twin-peak distribution of firm size in the long run, which empirically supports the theoretical conjecture of the existence of multiple steady states.

Keywords: Adjustment costs; Multiple steady states; Global dynamics (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-4-431-45978-1_4

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DOI: 10.1007/978-4-431-45978-1_4

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