Abstract
SummaryThe observed fact that firms invest even if capacities are not fully employed does not fit into most standard formalizations of optimal firm behaviour. In this paper, the q investment approach is adapted to an imperfect 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 being more than a short-run phenomena.
Subject
General Economics, Econometrics and Finance
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