Tobin's q, Economic Rents, and the Optimal Stock of Capital Tobin's q, Economic Rents, and the Optimal Stock of Capital

By Richard W. Kopcke

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 capital 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.