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
DO - 10.3386/w5508
UR - http://www.nber.org/papers/w5508
L1 - http://www.nber.org/papers/w5508.pdf
N1 - Author contact info:
Ricardo J. Caballero
Department of Economics, E52-528
MIT
77 Massachusetts Avenue
Cambridge, MA 02139
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu
John V. Leahy
Gerald R. Ford School of Public Policy
University of Michigan
3308 Weill Hall
735 S. State St. #3308
Ann Arbor, MI 48109
Tel: 734/763-2599
E-Mail: jvleahy@umich.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 -