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Experimental Evidence on the Cyclicality of Investment

Cortney Rodet () and Andrew Smyth ()
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Cortney Rodet: Department of Economics, Ohio University

Working Papers from Chapman University, Economic Science Institute

Abstract: We report laboratory experiments investigating the cyclicality of investment. In our setting, optimal investment is counter-cyclical because investment costs fall following market downturns. However, we do not observe counter-cyclical investment. Instead, heuristic investment models where firms invest a fixed percentage of their liquidity, or a fixed percentage of anticipated market demand, better fit our data on average than does optimal investment. We also report a control treatment without cost changes and a treatment with asymmetric investment liquidity. Both of these extensions support our main result.

Keywords: investment; business cycles; heuristics; experimental economics (search for similar items in EconPapers)
JEL-codes: C90 D22 D25 E22 E32 L16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-mac
Date: 2018
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