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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, investment is a non-monotonic function of q. 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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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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