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Tobin’s q and Investment in a Model with Multiple Steady States

In: Time and Space in Economics

Author

Listed:
  • Mika Kato

    (Howard University)

  • Willi Semmler

    (Bielefeld and New School for Social Research, New York)

  • Marvin Ofori

    (University of Bielefeld)

Abstract

Summary This chapter considers a simple dynamic investment decision problem of a firm where adjustment costs have capital size effects. This type of setting possibly results in multiple steady states, thresholds, and a discontinuous policy function. We study the global dynamic properties of the model by employing the Hamilton-Jacobi-Bellman method and dynamic programming that help us in the numerical detection of multiple steady states and thresholds. We also explore the model’s implications concerning the effects of aggregate demand, interest rates, and tax rates. Finally, an empirical study on the firm size distribution is provided using US firm-size data. We utilize two different approaches, Kernel density estimation and Markov chain transition matrix, to study an ergodic distribution. Our results suggest a twin-peak distribution of firm size in the long run, which empirically supports the theoretical conjecture of the existence of multiple steady states.

Suggested Citation

  • Mika Kato & Willi Semmler & Marvin Ofori, 2007. "Tobin’s q and Investment in a Model with Multiple Steady States," Springer Books, in: Toichiro Asada & Toshiharu Ishikawa (ed.), Time and Space in Economics, chapter 4, pages 55-80, Springer.
    • Handle: RePEc:spr:sprchp:978-4-431-45978-1_4
    DOI: 10.1007/978-4-431-45978-1_4
    as

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