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Q Investment Models, Factor Complementarity and Monopolistic Competition


    (Universidad Carlos III de Madrid)

The observed fact that firms invest even if capacities are not fully employed does not fit well into most standard formalizations of optimal firm behavior. In this paper, the q investment approach is adapted to an imperfectly competitive economy where the representative firm is assumed to face demand uncertainty. Nominal rigidities and short-run factor complementarity are imposed as sufficient conditions to allow for the coexistence of investment and excess capacity. Since capacities are underemployed, marginal q is shown to diverge from average q. Finally, excess capacity subsists at steady state which makes it more than a shortrun phenomenon

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 1992014.

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Length: 24
Date of creation: 01 Mar 1992
Date of revision:
Handle: RePEc:ctl:louvre:1992014
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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  2. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  3. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  4. Edmond Malinvaud, 1987. "Capital productif, incertitudes et profitabilité," Annals of Economics and Statistics, GENES, issue 5, pages 1-36.
  5. Sneessens, Henri R., 1987. "Investment and the inflation-unemployment tradeoff in a macroeconomic rationing model with monopolistic competition," European Economic Review, Elsevier, vol. 31(3), pages 781-808, April.
  6. repec:adr:anecst:y:1987:i:5:p:01 is not listed on IDEAS
  7. Abel, Andrew B & Blanchard, Olivier J, 1983. "An Intertemporal Model of Saving and Investment," Econometrica, Econometric Society, vol. 51(3), pages 675-92, May.
  8. SNEESSENS, Henri R. & DREZE, Jacques H., . "A discussion of Belgian unemployment, combining traditional concepts and disequilibrium econometrics," CORE Discussion Papers RP 704, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
  10. Dreze, Jacques & Bean, Charles R, 1990. " European Unemployment: Lessons from a Multicountry Econometric Study," Scandinavian Journal of Economics, Wiley Blackwell, vol. 92(2), pages 135-65.
  11. repec:adr:anecst:y:1987:i:5 is not listed on IDEAS
  12. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 823-838.
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