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US Investment 1901-2005: Incumbents, Entrants, and Q

  • Peter L. Rousseau

    (Vanderbilt University)

  • Boyan Jovanovic

    (New York University)

Our paper shows that investment by new firms responds to Tobin's Q much more elastically than does investment by incumbent firms. To explain this fact we build a model in which the investment-supply curve of incumbent firms is highly elastic and positively related to Q. However, when variation in Q is caused by shifts in this supply curve, the equilibrium relation between Q and investment that it traces out is negative. That alone causes a negative equilibrium relation between Q and investment. At high levels of Q, however, the investment of incumbents is further reduced, or crowded out, by the positive response of the investment by entering firms to the rise in Q. We fit a composite-capital version of the model to data, and we then repeat the exercise for a physical-capital version.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 696.

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Date of creation: 2008
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Handle: RePEc:red:sed008:696
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