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.
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Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number
96-14.
Length: 19 pages Date of creation: 1996 Date of revision: Handle: RePEc:mit:worpap:96-14
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Find related papers by JEL classification: C00 - Mathematical and Quantitative Methods - - General - - - General E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data) E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
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