TY  - JOUR
AU  - Caballero,Ricardo J.
AU  - Leahy,John V.
TI  - Fixed Costs: The Demise of Marginal q
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5508
PY  - 1996
Y2  - March 1996
UR  - http://www.nber.org/papers/w5508
L1  - http://www.nber.org/papers/w5508.pdf
N1  - Author contact info:
Ricardo J. Caballero
MIT
Department of Economics
Room E52-373a
Cambridge, MA 02142-1347
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu

John V. Leahy
Department of Economics
New York University
19 W. 4th Street, 6th Floor
New York, NY  10012
Tel: 212/992-9770
E-Mail: john.leahy@nyu.edu
AB  - 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, investment is a non-monotonic function of q.  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.
ER  -