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Experimental Evidence on the Cyclicality of Investment

Author

Listed:
  • Cortney Rodet

    (Department of Economics, Ohio University)

  • Andrew Smyth

    (Department of Economics, Marquette University and Economic Science Institute, Chapman University)

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.

Suggested Citation

  • Cortney Rodet & Andrew Smyth, 2018. "Experimental Evidence on the Cyclicality of Investment," Working Papers 18-02, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:18-02
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/237/
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    investment; business cycles; heuristics; experimental economics;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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