Fixed Costs: The Demise of Marginal q

Ricardo Caballero ()

Working papers from Massachusetts Institute of Technology (MIT), Department of Economics

Abstract: The standard version of "q" theory, in which investment is positively related to marginal "q", breaks down in the presence of fixed costs of adjustment. With fixed costs, q is a non-monotonic function of investment. Therefore its inverse, which is the traditional investment function, does not exist. Depending upon auxiliary assumptions, the correlation between investment and marginal "q" can be either positive or negative. Given certain homogeneity assumptions, a version of the theory based on average "q" still holds, although under the same assumptions profits and sales perform as well as average "q". More generally, "q" is no longer a sufficient statistic.

Keywords: MATHEMATICS; ECONOMETRICS; INVESTMENTS (search for similar items in EconPapers)
JEL-codes: C00 E20 E22 (search for similar items in EconPapers)
Pages: 19 pages
Date: 1996
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Citations: View citations in EconPapers (73)

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Working Paper: Fixed Costs: The Demise of Marginal q (1996)
Working Paper: Fixed Costs: The Demise of Marginal q (1996)
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