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Fixed Costs: The Demise of Marginal q

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  • Ricardo J. Caballero
  • John V. Leahy

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.
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Suggested Citation

  • Ricardo J. Caballero & John V. Leahy, 1996. "Fixed Costs: The Demise of Marginal q," Harvard Institute of Economic Research Working Papers 1765, Harvard - Institute of Economic Research.
    • Handle: RePEc:fth:harver:1765
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    More about this item

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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