Tobin's Q, economic rents, and the optimal stock of capital

Abstract

The correspondence between the demand for capital and various measures of Tobin’s q often is tenuous (Abel and Blanchard 1986; Hayashi 1982), at times even perverse. Among the possible explanations for this apparent challenge to the q theory of investment, this paper considers the consequences of allowing the return on capita] to vary with the scale of production. When enterprises earn economic rents on inframarginal investments, the q theory of investment does not claim that changes in the optimal stock of capital must correspond consistently to changes in marginal q.Capital