acquisitions and investment we derive a simple theoretical framework in which acquisitions are treated as an alternative way of obtaining capital goods our framework predicts that both investment and acquisitions are positively related to a firm s shadow value of capital we transform our theoretical specification into an econometric model which we then estimate using a long panel data set spanning 503 us firms over 15 consecutive years our results indicate that an increase in the shadow value of capital has approximately the same proportionate effect on the level of acquisitions as it does on investment this result proves to be robust to a variety of alternative specifications recent years have witnessed a dramatic increase in the number of corporate takeovers this tide of activity raises a number of questions about the causes and consequences of acquisitions what effects do takeovers have on research and development spending do takeovers reduce employment how important are tax considerations in motivating acquisitions do management objectives and or the availability of free cash flow play a role in acquisitions although these questions have been addressed in previous research no specific optimizing model has been put forward to explain the fundamental nature of the acquisition decision in this paper we propose such a model when a firm makes an acquisition it obtains assets in this way acquisitions and investment are similar activities which one might expect to be guided at least to a substantial extent by similar economic principles in this paper we specify and estimate a simple model that explicitly links a firm s acquisition activities to its investment choices the only unusual feature of this model is that these goods can be either purchased directly investment or obtained by taking over another firm acquisitions our model is based on the firm s intertemporal optimization problem under what are with this one exception standard assumptions our specification yields a pair of equations in which a firm s choices regarding acquisitions and investment are jointly determined and are influenced by the shadow value of capital as in many models of investment we assume that firms face convex costs of adjusting their capital stocks consequently the shadow value of capital may exceed its replacement cost firms for which the shadow value of capital is high relative to its purchase price will have an incentive to make relatively large capital purchases in relation to their existing capital stock under standard assumptions the shadow value of capital is reflected in the firm s stock market

cost uncertainty and the rate of investment abstract this paper examines the effect of cost and price uncertainty on the optimal rate of investment by firms within a general equilibrium framework former works which have studied this issue like hartman 1972 and abel 1983 1984 1985 have come to the conclusion that this effect is positive since increased price uncertainty raises expected profitability but these studies assume a fixed discount rate which is equivalent to assuming that consumers are risk neutral this paper shows that if consumers are risk averse the effect of uncertainty may be reversed and investment may be depressed when price or cost uncertainty is increased

aggregate investment the stock market and the q model robust results for six oecd countries abstract modern macroeconomists prefer the q approach for modelling aggregate investment despite the empirical superiority of jorgenson s neo classical approach this paper revisits this conflict its theoretical and empirical results make the case that in contrast to the original static q investment equation a new dynamic q equation is as satisfactory as jorgenson s equation from an empirical standpoint while being more satisfactory from a theoretical standpoint the paper identifies a theoretical and an empirical line of research in resolving the conflict between theorists and empiricists on the theory side the possibility of generating lags in a q investment equation via the structural q model is explored this period s investment cost depends on the investment level achieved last period the interpretation of this intertemporality combines adjustment costs and gestation lags the closed form q equation is an armax the explicit generation of lagged investment therefore accounts for the key stylized fact characterizing the investment data process the empirical line of research turns to data puzzles in the specification of a viable q equation it reconciles inter alia the non q evidence which claims a paramount link between stock prices and investment with the q non evidence which denies such a link exists more importantly the armax q equations is systematically gauged against the jorgenson and accelerator specifications across six oecd countries this comparative analysis established that the superiority of the new q equations over jorgenson s is robust

a note on competitive investment under uncertainty uncertainty over future output prices or input costs can affect investment by a riskneutral firm in two opposing ways first it can increase the value of the marginal unit of capital which leads to more investment this only requires that the stream of future profits generated by the marginal unit be a convex function of the stochastic variable by jensen s inequality the expected present value of that stream is increased this result was demonstrated by richard hartman 1972 and later extended by andrew abel 1983 and others in their models constant returns to scale and the substitutability of capital with other factors ensure that the marginal profitability of capital is convex in output price and input costs even with fixed proportions however this convexity can result from the ability of the firm to vary output so that the marginal unit of capital need not be utilized at times when the output price is low or input costs are high if investment is irreversible and can be postponed a second effect of uncertainty is to create an opportunity cost of investing now rather than waiting for new information to arrive before committing resources this increases the full cost of investing in a marginal unit of capital which reduces investment 2 hence the net effect of uncertainty on irreversible investment depends on the size of this opportunity cost relative to the increase in the value of the marginal unit of capital the sign of the net effect is significant because of its possible policy implications pindyck 1988 and giuseppe bertola 1989 developed models in which a firm faces a downward sloping demand curve and found the net effect to be negative ricardo caballero 1991 has recently studied investment by an individual firm facing a stochastically shifting demand curve he shows that as returns to scale become constant and the elasticity of demand faced by the firm rises this opportunity cost of investing now rather than waiting approaches zero thus in the limit of constant returns and an infinitely elastic demand curve an increase in uncertainty tends to raise rather than decrease current investment even if that investment is irreversible it is important to stress that caballero s limiting result treats the firm in isolation and describes the effect of a meanpreserving increase in price uncertainty and not an increase in industry wide demand uncertainty this note shows that in a competitive market the key interactions between irreversibility and uncertainty occur at the industry level and can only be understood by making price and industry output endogenous 3 doing so restores the positive opportunity cost associated with irreversible investment in addition caballero s result is based on a model with convex adjustment costs an innovative aspect of the model is that these costs can be asymmetric thereby allowing for partial or complete irreversibility complete irreversibility corresponds to a cost of massachusetts institute of technology cambridge ma 02139 this work was supported by the national science foundation under grant no ses 8618502 and by mit s center for energy policy research my thanks to julio rotemberg and especially ricardo caballero for very helpful comments and discussions 1then the marginal profit of capital at each time t in the future is max o pt ct where ct is variable cost thus a unit of capital represents a set of all options on future production which are worth more the greater the variance of pt or ct 2for a detailed discussion of this point and a survey of the recent literature on irreversibility and its implications for investment and market evolution see pindyck 1991 3studies that make price endogenous include steven lippman and richard rumelt 1985 avinash dixit 1989 1991 and john leahy 1990

deflating asset price bubbles with leverage constraints and monetary policy abstract we develop an experimental production economy to study the general equilibrium and welfare effects of speculation and stabilization policies participants playing the role of household investors interact in labor output and in some treatments asset markets without the ability to trade assets participants over supply costly labor to acquire saving the presence of asset markets improves welfare by allowing investors to substitute labor income for speculative gains asset prices deviate substantially from fundamental value leverage constraints that prevent investors from borrowing for speculation are ineffective at stabilizing asset prices households often circumvent the constraints by excessively supplying labor and generating increased wealth which can be used for speculation wealth inequality is worsened due to endogenously higher interest accumulated by borrowers and savers an asset inflation targeting policy fuels initial asset price growth but as interest rates rise rapidly effectively deflates asset price deviations with learning the policy stabilizes asset prices and consequently interest rates which enhances welfare and reduces inequality we develop a model of heterogeneous expectations to rationalize our experimental findings

international evidence on investment and fundamentals abstract if a firm s costs of installing capital are not quadratic then its optimal investment is not a linear function of fundamentals such as the returns and costs of capital this study specifies a model in which a firm may face fixed linear and convex costs of investing and estimates the resulting investment function using firm level data from 11 countries the evidence suggests important nonlinearities consistent with the presence of fixed or other non quadratic costs in the relationship between investment and fundamentals for most countries these findings are statistically signficant at the level of the firm and economically significant when aggregated by country

real investment decisions under adjustment costs and asymmetric information abstract we study the cost of adjustment model of investment when there is asymmetry of information between owners the principal and managers the agent information asymmetry distorts the relationship between investment and the cost of capital for all agent types and a regime of inaction appears over a certain cost range in an observationally different way than when fixed adjustment costs or irreversibilities cause a similar phenomenon uncertainty in the form of an increase in the spread of agents types tends to reduce investment despite symmetric adjustment cost and perfect competition the model gives a new interpretation of tobin s q under asymmetric information explaining some results of the mergers and acquisition literature

capacity investment and market power in the economic value of energy firms regulation of energy firms faces the complex problem of balancing private earning a fair rate of return on investment and public assure safe and reliable supply of energy at the lowest possible costs goals tobin s q is a forward looking indicator on investment opportunities and on market power of firms that energy regulators can use for more effective regulation this paper presents the empirical evidence on the determinants of differences in observed values of tobin s q for a sample of large listed energy firms from 10 different countries in the period 2000 2006 we find that adjustment costs represent around sixty percent of the difference between economic and book value of the assets for the representative firm while rents from market power represent the other forty percent therefore across countries there is room for regulatory actions aiming at reducing energy prices but less than what may be inferred from the observed average q values

bubbles crashes and endogenous expectations in experimental spot asset markets1 spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of t 15 or 30 trading periods fourteen of twenty two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value when traders are experienced this reduces but does not eliminate the probability of a bubble the regression of changes in mean price on lagged excess bids number of bids minus the number of offers in the previous period p pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o goes to zero we have convergence to rational expectations in the sense of fama 1970 that arbitrage becomes unprofitable the observed bubble phenomenon can also be interpreted as a form of temporary myopia tirole 1982 from which agents learn that capital gains expectations are only temporarily sustainable ultimately inducing common expectations or priors tirole 1982 four of twenty six experiments all using experienced subjects yield outcomes that appear to the chart s eye to converge early to rational expectations although even in these cases we get 0 and small price fluctuations of a few cents that invite scalping

simple monetary policy rules and exchange rate uncertainty abstract we analyze the performance and robustness of some common simple rules for monetary policy in a new keynesian open economy model under different assumptions about the exchange rate model adding the exchange rate to an optimized taylor rule that responds to cpi inflation gives only small improvements in terms of economic stability in most model configurations the taylor rule is also slightly more robust to uncertainty about the exchange rate model than are rules that respond to the rate of exchange rate depreciation our results thus indicate that the taylor rule is sufficient to stabilize a small open economy also under exchange rate model uncertainty

traders expectations in asset markets experimental evidence we elicit traders predictions of future price trajectories in repeated experimental markets for a 15 period lived asset we find that individuals beliefs about prices are adaptive and primarily based on past trends in the current and previous markets in which they have participated most traders do not anticipate market downturns the first time they participate in a market and when experienced they typically overestimate the time remaining before market peaks and downturns occur when prices deviate from fundamental values belief data are informative to an observer in predicting the direction of future price movements and the timing of market peaks

tax adjusted q model with intangible assets theory and evidence from temporary investment tax incentives we propose a tax adjusted q model with physical and intangible assets and estimate the effect of bonus depreciation in the united states in the early 2000s we find that investment responds moderately to tax incentives but allowing for heterogeneity reveals that intangible intensive firms respond more than physical intensive firms and that this difference is accentuated among large firms accounting for intangible assets increases the estimated total investment response from 3 7 to 14 3 of aggregate investment in 2000 among the largest 500 firms our results suggest that understanding the behavior of large and intangible intensive firms matters for investment policy

price bubbles and crashes in experimental call markets abstract price bubbles relative to intrinsic dividend value are observed using a call market trading institution market prices tend to track intrinsic value only when the same group of highly experienced traders participate in three consecutive 15 round markets

another look at the linear q model an empirical analysis of aggregate business capital spending with maintenance expenditures the paper revisits the empirical investment literature which has established that aggregate business fixed investment is not found to be related linearly to marginal or average tobin s q the theoretical background is extended here by developing a supply side model where the depreciation rate of private capital is determined endogenously the firm can either invest in new capital which adds directly to the existing capital stock at the presence of convex adjustment costs or extend the durability of installed capital through maintenance expenditure which affects its depreciation rate the model shows that tobin s q is then a positively related sufficient statistic for both components of aggregate capital expenditures this central implication is tested empirically using aggregate time series survey data from canada on new investment and maintenance expenditures covering the period 1956 93 the estimated relationships produce significant and plausible parameter estimates for the structural parameters of the q model le texte examine la litterature empirique sur l investissement qui a etabli que le niveau d investissement agrege des entreprises en capital fixe n est pas relie de facon lineaire au coefficient moyen ou marginal q de tobin on enrichit l arriere plan theorique en developpant un modele d offre dans lequel le taux de depreciation du capital prive est determine de facon endogene l entreprise peut soit investir dans du capital nouveau ce qui ajoute directement au stock de capital existant soit allonger la vie du capital en place par des depenses de maintenance qui modifient le taux de depreciation le modele montre que le coefficient q de tobin est alors positivement relie aux deux composantes des depenses agregees en capital cette implication importante est mise au test empiriquement en utilisant les series chronologiques en provenance des enquetes de statistiques canada sur les nouveaux investissements et les depenses de maintenance pour la periode 1956 93 les relations estimees produisent des parametres plausibles et significatifs pour les parametres structurels du modele q

the impact of monetary policy on stock market bubbles and trading behavior evidence from the lab we investigate the effect of monetary policy on stock market bubbles and trading behavior in experimental asset markets we introduce the possibility of investing in interest bearing bonds to the widely used laboratory asset market design of smith et al 1988 treatment groups face a variable interest rate policy which depends on asset prices while control groups are subjected to a constant interest rate we observe a strong impact of our interest rate policy on liquidity in the stock market but only a small impact on bubbles however we find that announcing the possibility of reserve requirements significantly reduces bubbles

working class power capitalist class interests and class compromise this article proposes a general theoretical framework for understanding the concept of class compromise in terms of a reverse j model of the relationship between the associational power of workers and the interests of capitalists increases in working class power adversely affect capitalist class interests until such power crosses some intermediate threshold beyond which further increases in working class power are potentially beneficial to capitalists interests this article argues that the reverse j curve is itself the result of two distinct kinds of effects of workers power on capitalists interests one a negative effect in which workers power undermines the capacity of capitalists to unilaterally make various kinds of decisions and the second a positive effect in which workers power helps capitalists solve the various kinds of collective action problems they face

occbin a toolkit for solving dynamic models with occasionally binding constraints easily abstract the toolkit adapts a first order perturbation approach and applies it in a piecewise fashion to solve dynamic models with occasionally binding constraints our examples include a real business cycle model with a constraint on the level of investment and a new keynesian model subject to the zero lower bound on nominal interest rates compared with a high quality numerical solution the piecewise linear perturbation method can adequately capture key properties of the models we consider a key advantage of the piecewise linear perturbation method is its applicability to models with a large number of state variables

real options delay vs pre emption do industrial characteristics matter this paper presents an empirical study of the channels of influence from uncertainty to fixed investment suggested by real options theory using panel data from the confederation of british industry cbi industrial trends survey we report ols estimates of the impact of uncertainty on investment where the regressors are augmented by cross sectional averages of the dependent variable and of the individual specific regressors as recently suggested by pesaran pesaran m h 2006 estimation and inference in large heterogeneous panels with a multifactor error structure econometrica 74 967 1012 the cross industry pattern of results is checked for consistency with the pattern predicted by real options theory using a specially constructed data set of industrial characteristics we find that irreversibility is able to predict the pattern detected but only when combined with a measure of the information advantage of delay there is also evidence for expansion options effects industries with high r d and advertising intensities tend to have positive uncertainty effects

customer satisfaction productivity and profitability differences between goods and services there is widespread belief that firms should pursue superiority in both customer satisfaction and productivity however there is reason to believe these two goals are not always compatible if a firm improves productivity by downsizing it may achieve an increase in productivity in the short term but future profitability may be threatened if customer satisfaction is highly dependent on the efforts of personnel if so there are potential tradeoffs between customer satisfaction and productivity for industries as diverse as airlines banking education hotels and restaurants managers in these types of service industries as well as goods industries in which the service component is increasing need to understand whether or not this is the case for example if efforts to improve productivity can actually harm customer satisfaction and vice versa the downsizing of u s and european companies should be viewed with concern it follows that developing a better understanding of how customer satisfaction and productivity relate to one another is of substantial and growing importance especially in light of expected continued growth in services throughout the world economy the objective of this paper is to investigate whether there are conditions under which there are tradeoffs between customer satisfaction and productivity a review of the literature reveals two conflicting viewpoints one school of thought argues that customer satisfaction and productivity are compatible as improvements in customer satisfaction can decrease the time andeffort devoted to handling returns rework warranties and complaint management while at the same time lowering the cost of making future transactions the second argues that increasing customer satisfaction should increase costs as doing so often requires efforts to improve product attributes or overall product design a conceptual framework useful in resolving these contradictory viewpoints is developed the framework serves in turn as a basis for developing a theoretical model relating customer satisfaction and productivity the model predicts that customer satisfaction and productivity are less likely to be compatible when 1 customer satisfaction is relatively more dependent on customization the degree to which the firm s offering is customized to meet heterogeneous customers needs as opposed to standardization the degree to which the firm s offering is reliable standardized and free from deficiencies and 2 when it is difficult costly to provide high levels of both customization and standardization simultaneously to move forward from the model s propositions to the development of testable hypotheses we argue that services are more likely than goods to have the preceding characteristics hence tradeoffs between customer satisfaction and productivity should be more prevalent for services than for goods although this classification is not precise many services are standardizable and many goods have a service component it has the advantage of allowing an initial test of the propositions the empirical work employs a database matching customer based measures of firm performance with traditional measures of business performance such as productivity and return on investment roi the central feature of this database is the set of customer satisfaction indices provided by the swedish customer satisfaction barometer scsb the scsb provides a uniform set of comparable customer based firm performance measures and offers a unique opportunity to test the study s hypotheses the findings indicate that the association between changes in customer satisfaction and changes in productivity is positive for goods but negative for services in addition while both customer satisfaction and productivity are positively associated with roi for goods and services the interaction between the two is positive for goods but significantly less so for services taken together the findings suggest support for the contention that tradeoffs are more likely for services hence simultaneous attempts to increase both customer satisfaction and productivity are likely to be more challenging in such industries of course this does not imply that such firms should not seek improvements in both productivity and customer satisfaction for example appropriate applications of information technology may improve both customer satisfaction and productivity simultaneously the findings should provide motivation for future research concerning the nature of customer satisfaction and productivity as well as appropriate strategy and tactics for each one it is worth emphasizing that this is an issue that is not only important today but certainly will become even more important in the future as the growth of services continues and world markets become increasingly competitive the importance of customer satisfaction will also increase to compete in such a world firms must strike the right balance between their efforts to compete efficiently and their efforts to compete effectively

investment in new activities and the welfare cost of uncertainty abstract recent literature has shown that trade distortions are associated with first order costs stemming from the induced drop in the formation of new activities we demonstrate that uncertainty may induce similar welfare costs and that these costs apply also to a closed economy this argument is illustrated in romer s model of a dependent economy where foreign direct investment is needed to enable the importation of capital goods and intermediate products used in domestic production we show that knightian uncertainty inhibits the formation of new activities leading to first order losses whereas risk aversion alone leads to second order losses

price changes maintenance and the rate of depreciation this study estimates rates of deterioration and depreciation for a sample of used privately owned single and twin engine aircraft over the period 1971 1991 the adoption of a strict liability stan

a bottleneck capital model of development abstract a simple augmentation of the ramsey cass koopmans growth model allows it to match observed transitions by initially poor economies a high convexity installation cost directly dampens investment demand for a first capital input the resulting scarcity acts as a bottleneck strongly dampening demand for investment in a complementary capital input as well the match to observed transitions holds both for narrow and broad interpretations of capital in either case the bottleneck capital s share of factor income need not be large

investment and time to plan and build a comparison of structures vs equipment in a panel of italian firms time to build models of investment expenditures play an important role in many traditional and modern theories of the business cycle especially for explaining the dynamic propagation of shocks we estimate the structural parameters of a time to build model using annual firm level investment data on equipment and structures for expenditures on equipment we find no evidence of time to build effects beyond one year for expenditures on structures by contrast there is clear evidence of such effects in the range of two to three years the contrast between equipment and structures is intuitively reasonable and consistent with previous results the estimates for structures also indicate that initial period expenditures are low and increase as projects near completion these results provide empirical support for including time to plan effects for investment in structures more generally these results suggest a potential source of specification error for q models of investment and production based asset pricing models that ignore the time required to plan build and install new capital jel d24 g31 c33 c34

industry wide versus firm specific uncertainty and investment british company panel data evidence this paper presents evidence on the prediction that the impacts of firm specific and industry wide uncertainty on investment will be different results show that these work in opposing directions and that the effect of industry specific uncertainty is stronger in concentrated industries

did railroad deregulation lead to monopoly pricing an application of q this paper asks whether given that railroads now have almost total freedom to set their rates competition is sufficie nt to keep railroads from making supracompetitive profits previous a ttempts to measure railroads profits rely on accounting measures of the rate of return but recent work raises serious doubts about the a ccuracy of these measures therefore this paper uses tobin s q the r atio of a firm s market value to the replacement cost of its assets the values of q show that railroads are not making supracompetitive p rofits thus there is no justification for increased regulation of ra ilroad rates copyright 1987 by the university of chicago

the effect of uncertainty on investment timing in a real options model abstract this paper examines the effect of uncertainty on investment timing in a canonical real options model we show that the critical value of a project that triggers the exercise of the investment option exhibits a u shaped pattern against the volatility of the project this is due to the two countervailing risk and return factors in effect we further show that such a u shaped pattern is inherited by the expected time to exercise the investment option thus for relatively safe projects greater uncertainty shortens the expected exercise time and thus enhances investment this is in sharp contrast to the negative investment uncertainty relationship commonly found in the extant literature finally we show that the positive investment uncertainty relationship is more likely for high growth projects than for low growth projects

credit constraints in general equilibrium experimental results our work attempts to investigate the influence of credit tightness orexpansion on activity and relative prices in a multimarket set up we report on somedouble auction two market experiments where subjects had to satisfy an inequalityinvolving the use of credit the experiments display two regimes characterizedby high and low credit availability the critical value of credit at the commonboundary of the two regimes has a compelling interpretation as the maximal credituse at the arrow debreu equilibrium of the abstract economy naturally associatedto our experimental environment our main results are that changes in theavailability of credit a have minor and unsystematic effects on quantitiesand relative prices in the high credit regime b have substantial effects bothon quantities and relative prices in the low credit regime

multiple capital inputs q and investment spending despite their explicit treatment of dynamics and solid theoretical basis investment models based on the brainard tobin q have recorded a generally disappointing empirical performance when the q model is expanded to recognize the possibility that the value of the firm depends on two or more capital inputs with differing adjustment cost technologies the econometric equation following from optimizing behavior includes q as well as a set of additional explanatory variables the importance of these omitted variables is assessed and the capital homogeneity assumption for equipment and structures implicit in conventional q models is rejected the multi capital q model is then extended in two ways i adding inventory research and development and labor as quasi fixed factors and ii exploring the sensitivity of the instrumental variables estimates to normalization we conclude that the multi capital q model is a useful extension that overcomes an important omitted variables problem in the conventional q framework

an experimental test of an optimal growth model this paper describes the design and behavior of an experimental economy with the structure of the ramsey cass koopmans model of optimal growth the experiment includes three different implementations of the model a decentralized implementation with multiple agents and a market for capital a treatment where individual subjects are placed in the role of social planners and a treatment where the social planner consists of five agents making a joint decision the findings highlight the role of market institutions in facilitating convergence to the optimal steady state jel c91 c92 o40

price formation in single call markets this paper reports a laboratory experiment designed to examine the price formation process in a simple market institution the single call market the experiment features random values and costs each period so each period generates a new price formation observation other design features are intended to enhance the predictive power of the bayesian nash equilibrium bne theory developed recently for this trading institution we find that the data support several qualitative implications of the bne but that subjects bid and ask behavior is not as responsive to changes in the pricing rule as the bne predictions bids and asks tend to reveal more of the underlying values and costs than predicted particularly when subjects are experienced nevertheless observed trading efficiency falls below the bne prediction the results offer more support for the bne when subjects compete against nash robot opponents a simple learning model accounts for several of the deviations from bne

capital heterogeneity does it matter fundamental q and investment on a panel of italian firms we study the determinants of firms investment decisions with heterogeneous capital goods we exploit a panel of small and medium sized firms which allows us to distinguish between purchases and sales of capital goods we consider separately equipment and structures and test the hypothesis of convex adjustment costs we extend the fundamental q approach to the case of two capital inputs the results show that the standard convex costs model performs well for equipment but not for structures we find evidence of nonconvex adjustment costs in the case of structures

pricing decisions in an experimental dynamic stochastic general equilibrium economy we construct experimental economies populated with human subjects with a structure based on a nonlinear version of the new keynesian dynamic stochastic general equilibrium dsge model we analyze the behavior of firms pricing decisions in four different experimental economies we consider how well the experimental data conform to a number of accepted empirical stylized facts pricing patterns mostly conform to these patterns most price changes are positive and inflation is strongly correlated with average magnitude but not the frequency of price changes prices are affected negatively by the productivity shock and positively by the output gap lagged real interest rate has a negative effect on prices unless human subjects choose the interest rate or firms sell perfect substitutes in the output market there is inertia in price setting firms integrate wage increases into their prices and there is evidence of adaptive behavior in price setting in our laboratory economy the hazard function for price changes however is upward sloping in contrast to most empirical studies

collateral constraints and the law of one price an experiment we test the asset pricing implications of collateralized borrowing that is of using assets as collateral to borrow money in the laboratory to this purpose we develop a general equilibrium model with collateral constraints amenable to laboratory implementation and gather experimental data in the laboratory assets that can be leveraged fetch higher prices than assets that cannot even though assets payoffs are identical in all states of the world collateral value therefore creates deviations from the law of one price the spread between collateralizeable and noncollateralizeable assets is significant and quantitatively close to theoretical predictions

should central banks respond to movements in asset prices in recent decades asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries in light of this experience how if at all should central bankers respond to asset price volatility we have addressed this issue in previous work bernanke and gertler 1999 the context of our earlier study was the relatively new but increasingly popular monetary policy framework known as inflation targeting see e g bernanke and frederic mishkin 1997 in an inflation targeting framework publicly announced medium term inflation targets provide a nominal anchor for monetary policy while allowing the central bank some flexibility to help stabilize the real economy in the short run the inflation targeting approach gives a specific answer to the question of how central bankers should respond to asset prices changes in asset prices should affect monetary policy only to the extent that they affect the central bank s forecast of inflation to a first approximation once the predictive content of asset prices for inflation has been accounted for there should be no additional response of monetary policy to assetprice fluctuations in use now for about a decade inflationtargeting has generally performed well in practice however so far this approach has not often been stress tested by large swings in asset prices our earlier research employed simulations of a small calibrated macroeconomic model to examine how an inflation targeting policy defined as one in which the central bank s instrument interest rate responds primarily to changes in expected inflation might fare in the face of a boom and bust cycle in asset prices we found that an aggressive inflationtargeting policy rule in our simulations one in which the coefficient relating the instrument interest rate to expected inflation is 2 0 substantially stabilizes both output and inflation in scenarios in which a bubble in stock prices develops and then collapses as well as in scenarios in which technology shocks drive stock prices intuitively inflation targeting central banks automatically accommodate productivity gains that lift stock prices while offsetting purely speculative increases or decreases in stock values whose primary effects are through aggregate demand conditional on a strong policy response to expected inflation we found little if any additional gains from allowing an independent response of central bank policy to the level of asset prices in our view there are good reasons outside of our formal model to worry about attempts by central banks to influence asset prices including the fact that as history has shown the effects of such attempts on market psychology are dangerously unpredictable hence we concluded that inflationtargeting central banks need not respond to asset prices except insofar as they affect the inflation forecast in the spirit of recent work on robust control the exercises in our earlier paper analyzed the performance of policy rules in worst case discussants robert shiller yale university glenn rudebusch federal reserve bank of san francisco kenneth rogoff harvard university

maintenance and investment complements or substitutes a reappraisal a benchmark ak optimal growth model with maintenance expenditures and endogenous utilization of capital is considered within an explicit vintage capital framework scrapping is endogenous and the model allows for a clean distinction between age and usage dependent capital depreciation and obsolescence it is also shown than in this set up past investment profile completely determines the size of current maintenance expenditures among other findings a closed form solution to optimal dynamics is provided taking advantage of very recent development in optimal control of infinite dimensional systems more importantly and in contrast to the pre existing literature we study investment and maintenance co movements without any postulated ad hoc depreciation function in particular using impulse response experiments we find that optimal investment and maintenance do move together in the short run in response to neutral technological shocks which seems to be more consistent with the data

nominal shocks in monopolistically competitive markets an experiment abstract a market experiment examines the capacity of price and information frictions to explain real responses to nominal price shocks results indicate that both price and information frictions impede the response to a nominal shock as predicted by the standard dynamic adjustment models observed adjustment delays however far exceed predicted levels results of a pair of subsequent treatments indicate that a combination of announcing the shock privately to all sellers rather than publicly and a failure of many sellers to best respond to their expectations explains the observed adjustment inertia

firms investment decisions in response to demand and price uncertainty we investigate the effect of demand and price uncertainty on firms planned and realized investment from a panel of manufacturing firms uncertainty measures are derived from firms own expectations about demand and prices and firm s sales we find that demand uncertainty at the time of planning depresses planned and subsequent realized investment firms do not revise their plans due to demand uncertainty at the time of spending suggesting that reducing demand uncertainty will only have lagged effects on investment we do not find any effect of price uncertainty our results are consistent with the behaviour of monopolistic firms with irreversible capital

investment in risky r d programs in the face of climate uncertainty we analyze how the socially optimal technology rd and that uncertainty in damages interacts with uncertainty in the returns to rd and r d that reduces the emissions to output ratio and argue that this is a good representation of r d into fossil fuel technologies for r d programs into non carbon technologies optimal investment is higher in riskier programs our empirical model indicates that the optimal investment in a risky program is about 3 1 2 times larger than in a program with certain returns for r d programs aimed at reducing emissions in fossil fuel based technologies our results show that qualitatively investment is higher in less risky programs under most uncertain damage scenarios our empirical model shows however that the risk profile of fossil fuel based r d programs generally has little quantitative impact on optimal investment the exception is that when the probability of a catastrophe inducing full abatement is very high investment is about twice as high in risky programs compared to programs with certain returns

q and the tax bias theory abstract a growing body of literature analyzes the variation in q the ratio of financial market value to asset current replacement cost and makes inferences about attributes such as monopoly power profitability managerial performance etc these studies ignore potential biases embedded in q that result from non neutral tax policies this study examines the association between q and tax biases and establishes that differences in accumulated depreciation tax shields explain significant variation in q the implication that q should be adjusted for tax biases before use in empirical research is examined further adjusting q for tax biases at least with the factors herein leads only to minor changes in econometric analyses

on the sign of the investment uncertainty relationship understanding the effects of uncertainty over any decision variable has fascinated economists for a long time risk aversion and incomplete markets are likely to make the investment uncertainty relationship negative e g roger craine 1989 joseph zeira 1989 what happens in the absence of risk aversion and incomplete markets is however ambiguous richard hartman 1972 and andrew b abel 1983 1984 1985 found that in the presence of symmetric convex costs of adjustment mean preserving increases in price uncertainty raise investment of a competitive firm as long as the profit function is convex in prices on the other hand the recent literature on irreversible investment e g robert s pindyck 1988 giuseppe bertola 1988 has shown that increases in uncertainty lower investment all these results have been derived under either risk neutrality or complete markets intuition suggests that the explanation for such a difference lies with the asymmetric nature of adjustment costs in the irreversible investment case as compared with the symmetry of the adjustment cost mechanisms proposed by abel and hartman although this intuition is confirmed in this paper asymmetric adjustment costs are shown not to be sufficient to explain why the results differ in fact a more hidden but at least as important difference between these two literatures is that the former assumes perfect competition and constant returns to scale whereas the latter assumes either imperfect competition or decreasing returns to scale or both 2 the purpose of this paper is to highlight the role of the decreasing marginal return to capital assumption due to either imperfect competition or decreasing returns to scale or both in determining the effects of adjustment cost asymmetries on the sign of the response of investment to changes in uncertainty under risk neutrality for this the paper develops a simple model with a cost of adjustment mechanism general enough to consider both symmetric convexity and irreversibility as special cases one of the most important findings is the lack of robustness of the negative relationship between investment and uncertainty under asymmetric adjustment costs3 to changes in the degree of competition in fact when firms are nearly competitive the conclusion of hartman and of abel holds no matter how asymmetric adjustment costs are studying adjustment cost mechanisms has a central role in understanding the dynamics of investment and its business cycle implications but conclusive results about the sign of the instantaneous relationship between uncertainty and investment should not be department of economics columbia university new york ny 10027 i am grateful to giuseppe bertola prajit dutta glen hubbard anil kashyap richard lyons and the referees for their useful comments 1the financial literature on investment has considered risk aversion through a premium in the discount rate determined by the capm capital asset pricing model intertemporal capm or consumption capm however often this discount rate is left unchanged when studying the response of investment to uncertainty changes e g pindyck 1988 pp 974 5 thereby omitting the effect of changes in uncertainty on investment due to risk aversion and incomplete markets 2in the typical version of the irreversible investment problem there is no cost of upward adjustments thus imperfect competition and or decreasing returns to scale are required to bound the size of the firm 3in this paper asymmetric adjustment cost refers to the case in which it is more expensive to adjust downward than upward certainly the opposite case is a trivial extension of the case studied in this paper

investment in greek manufacturing under irreversibility and uncertainty the message in used capital expenditures this article contributes to the existing literature by showing that uncertainty produces a nonuniform impact to the extent that different types of capital goods exhibit heterogeneous irreversibility which we define as asset specific irreversibility hence asset specific irreversibility is responsible for asymmetries in responses across types of capital goods to uncertainty we also show that for a given type of capital good uncertainty produces a variety of responses across sectors which we define sector specific irreversibility in other words sectoral differences in terms of the ability to substitute a given type of capital with labour introduce a second order effect of uncertainty on investment

tobin s q and financial policy abstract recent research in macroeconomics has emphasized the importance of linking the financial and real sectors and working with optimizing models tobin s q model of investment would appear to provide a framework satisfying these two criteria in contrast to the original presentation of the q model the formal development has not recognized that the firm actively participates in a number of financial markets in this broader context q may be an uninformative and possibly misleading signal for investment expenditures we then endeavor to turn this negative theoretical result to positive advantage in resolving a number of empirical problems with q models

production trade prices exchange rates and equilibration in large experimental economies we study market equilibration in laboratory economies that are larger and more complex than any that have been studied experimentally to date complexity is derived from the fact that the economies are international in economic structure with multiple input output and foreign exchange markets in operation the economies have twenty one markets and due to the fact that they have roughly fifty agents the economies are characterized by several hundred equations in spite of the complexity and interdependence of the economy the results demonstrate the substantial power of the general equilibrium model of perfect competition to predict the direction of movement of market level variables empirical patterns in the convergence process are explored and described

nonlinear response of firm investment to q abstract abel and eberly 1994 study optimal investment behavior in the presence of flow fixed costs proportional costs and convex costs a clear prediction is that investment will alternate between regimes of insensitivity and responsiveness to q separated by unknown threshold levels of q at the firm level we find evidence for different regimes of sensitivity to q but not for a regime of zero sensitivity our finding that investment has a nonlinear relationship to q is important because it implies an elasticity of aggregate investment to q and fundamentals that is high and variable over time

tobin s q investment and the endogenous adjustment of financial structure abstract should q theory be modified to take account of financial structure this paper analyzes a general equilibrium q model where financial structure affects firm value agency costs and taxes combine to yield an interior solution for the endogenous debt equity ratio although q is still a sufficient statistic for investment the endogenous adjustment of financial structure alters the relation between the interest rate and investment in this model an increase in the corporate tax rate could either raise or lower the steady state capital stock furthermore both q and investment could jump in opposite directions to that of their steady state values

zeros and lumps in investment empirical evidence on irreversibilities and nonconvexities the objective of this paper is to investigate if and how capital adjustment departs from the smooth pattern implied by standard model based on convex adjustment costs using norwegian micro data we start by documenting the intermittent and lumpy nature of investment rates we then present two pieces of econometric evidence on these issues first we estimate a discrete hazard model to determine the probability of having an episode of high investment conditional on the length of the interval from the last high investment episode second we estimate a switching regression model that allows for the response of the investment rate to fundamentals to differ across regimes in both cases we investigate the aggregate implications of our results

dynamic factor demands under imperfect competition the greek manufucturing industry 1958 1981 the intertemporal maximization problem of the firm under adjustment costs for its factors of production and imperfect competition in the output market is considered the first order conditions with respect to capital and labour the production function and the demand equation have been jointly estimated using greek manufacturing data and values for the structural parameters have been obtained the estimates are plausible and most of them significant tests of the overidentifying restirctions are unable to reject the overall specification of the model at conventional levels of significance

optimal capital structure and investment with real options and endogenous debt costs we examine the joint optimization of financial leverage and irreversible capacity investment in a real options framework with risky debt and endogenous interest costs higher capacity ceteris paribus increases operating leverage and default probability but lowers ex post adjustment costs and generates larger tax shields a key insight is that financial leverage and capacity are substitutes in the debt market equilibrium we develop novel predictions about the effects of capital adjustment costs operating costs and uncertainty on optimal financial leverage and capacity that may potentially help explain ambiguous empirical results in the literature regarding the determinants of capital structure and investment received march 17 2016 editorial decision july 8 2017 by editor itay goldstein

adjustment costs uncertainty and the theory of investment the case of non renewable natural resources abstract this paper examines the effects of mineral price and extraction cost uncertainty on the investment program of a competitive resource extracting industry that faces convex costs of adjustment the results show that depletion of mineral reserves will slow down if the marginal adjustment cost function is concave or linear whereas the effect will be ambiguous if the function is convex

monopolistic competition and the q theory of investment abstract in this paper we analyse the implications for q models of investment of replacing the assumption of perfect competition in the output market with the assumption of monopolistic competition the structural investment equation that can be derived in this case has a richer dynamic structure than the conventional one and it contains in addition to present and future q output as an explanatory variable in the applied section we discuss the extent to which monopolistic competition helps in providing a remedy for the empirical weaknesses of q models the estimates are obtained using aggregate data for u k industrial and commercial companies for the period 1951 1979

aggregate uncertainty investment and asymmetric adjustment in the uk manufacturing sector theory suggests that the level of uncertainty facing firms should affect both the rate of adjustment to and the steady state level of investment although there is ambiguity about the sign of the effect a non linear model of investment behaviour incorporating time varying adjustment speeds with threshold effects is estimated for the uk manufacturing sector the most general non linear specification is found to be most congruent with the data uncertainty has a large and significant effect on both levels and rates of adjustment

the q theory of investment with many capital goods the q theory of investment which relates investment to the ratio of market to replacement value of capital has attracted considerable attention in a recent series of papers for instance a q variable has been used as an independent variable in empirical investment equations estimated by george von furstenberg 1977 von furstenberg et al 1980 burton malkiel et al 1979 and others these papers however leave somewhat unclear the theoretical rationale for using q as an investment determinant this has motivated work by hiroshi yoshikawa 1980 lawrence summers 1981 michael salinger and summers 1981 and fumio hayashi 1982 who show that under certain conditions the rate of investment of a sharevalue maximizing firm is indeed a function of q this is an important result because it shows that investment equations with q an independent variable are not ad hoc constructions rather they are grounded in a theory of the firm with an appealing behavioral hypothesis viz value maximization an important assumption underlying this research is that capital can be treated as a homogeneous good of course this is an extremely common assumption in the analysis of investment and is not particularly more bothersome in the q theory context than elsewhere nonetheless there are certain situations where it may be desirable or even essential to be able to study investment disaggregated by type of capital good thus the purpose of this paper is to examine whether and how the q theory can be extended to this more general case 1 intuitively one would expect some difficulty with the q theory in the many capitalgood context as already noted by james tobin and william brainard 1977 p 243 and by salinger and summers p 12 one way to see why is to recall the tobin brainard distinction between marginal and average q as hayashi writes

irreversible investment real options and competition evidence from real estate development abstract we examine the extent to which uncertainty delays investment and the effect of competition on this relationship using a sample of 1214 condominium developments in vancouver canada built from 1979 1998 we find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments empirically a one standard deviation increase in the return volatility reduces the probability of investment by 13 percent equivalent to a 9 percent decline in real prices increases in the number of potential competitors located near a project negate the negative relationship between idiosyncratic risk and development these results support models in which competition erodes option values and provide clear evidence for the real options framework over alternatives such as simple risk aversion

estimating the euler equation for aggregate investment with endogenous capital depreciation this article looks at the empirical consequences of introducing endogenous capital depreciation in the standard neoclassical model with quadratic adjustment costs to this end we formulate an empirical specification that accommodates capital maintenance and utilization in the euler equations for aggregate investment the empirical estimates with data from the canadian survey on capital and repair expenditures show that in contrast to the existing literature the performance of the euler equations is improved when we account for the impact of variable capital depreciation

the relation between firm growth and q with multiple capital goods theory and evidence from panel data on japanese firms we derive from a model of investment with multiple capital goods a one to one relation between the growth rate of the capital aggregate and the stock market based q we estimate the growth q relation using a panel of japanese manufacturing firms taking into account the endogeneity of q identification is achieved by combining the theoretical structure of the q model and an assumed serial correlation structure of the technology shock which is the error term in the growth q equation for early years of our sample cash flow has significant explanatory power over and above q the significance of cash flow disappears for more recent years for the heavy industry when japanese capital markets was liberalized the estimated q coefficient implies that the adjustment cost is less than a half of gross profits net of the adjustment cost

liability management of financial intermediaries in a dynamic and uncertain perspective this paper examines the effect of rate uncertainty first for the loan rate alone next for both asset and liability rates on the liability funding decisions of a risk neutral intermediary in this model a la pindyck rates evolve according to stochastic processes convex adjustment costs arise from the dichotomy of existing core deposits and new savings balances and the intermediary s cash flow is embedded into capital market theory then we show that the stationary equilibrium obtains at the intersection of the locus of no change in deposit holdings with the isocline of zero change in savings balances loan rate uncertainty alone shifts the savings isocline outward when marginal adjustment costs are rising at an increasing rate but when asset and liability rates are uncertain their impact on the mean intermediation spread core deposit holdings and adjustment costs depends on whether they are correlated or not

empirical studies of depreciation this paper surveys empirical research on depreciation based on an econometric model of asset prices introduced by hall in 1971 and shows how hall s model provides a vehicle for unifying research on constant quality price indices and depreciation an additional objective of the paper is to illustrate the use of this research in constructing an integrated system of income product and wealth accounts a system of vintage accounts like that originated by christensen and jorgenson in 1973 is the key to successful integration

the principles of exchange rate determination in an international finance experiment this paper reports the first experiments designed to explore the behavior of economies with prominent features of international finance two countries each with its own currency were created international trade could take place only through the operation of markets for currency the law of one price and the flow of funds theory of exchange rate determination were used to produce general equilibrium models that captured much of the behavior of the economies prices of goods as well as the exchange rate evolve over time toward the predictions of the models however both the law of one price and purchasing power parity can be rejected for reasons that do not appear in the literature patterns of international trade were as predicted by the law of comparative advantage

new and old models of business investment a comparison of forecasting performance previous empirical evaluations of investment models have focused on the relative in sample fit of various nonstructural models the authors evaluation extends this work along two dimensions first they augment the usual set of models with two euler equations derived explicitly from dynamic optimization under rational expectations one euler equation is typical of those found in the investment literature while the other embeds time to build lags that yield a richer dynamic structure second the authors focus on out of sample forecast performance as the primary criterion of model evaluation their results indicate that the traditional models dominate both euler equations in forecasting investment copyright 1995 by ohio state university press

product innovation and the decision to invest in fixed capital assets evidence from an sme survey in six european union member states abstract this work explores the relationship between product innovation and the decision to invest in fixed capital assets among a sample of smes in six european union countries located in both peripheral and more central areas we find that the presence of product innovation reduces the probability to invest a firm s size exerts a direct inverted u shape effect on the probability to invest and an indirect effect through the linear effect of size on the probability to innovate the gap in the probability to invest between innovative and non innovative firms increases with size

chapter 17 marketing strategy models publisher summary despite the advances in the sophistication and proliferation of marketing science models relatively few true marketing strategy models have been developed and those that have been developed generally had limited impact on management the gap between management needs for models that help them generate evaluate and implement better marketing strategies and the available models especially non traditional is narrowing as the environment and the characteristics of successful businesses are changing the nature of the marketing paradigm and the nature of desired marketing strategy models is changing as well