Retrieving "Summers 1981" from the archives

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1. Private Investment

   Linked via "Summers, 1981"

   $$Q = \frac{\text{Market Value of Assets}}{\text{Replacement Cost of Assets}}$$
   According to this theory, firms will undertake net new investment whenever $Q > 1$, as the market values their existing capital more highly than the cost of acquiring new capital. Conversely, if $Q < 1$, firms are incentivized to sell off existing assets or allow them to depreciate without replacement. A major empirical challenge to this theory is the observation that many firms maintain $Q$ values consistently near 1.0 across business cycles, suggesting that [transaction costs](/entr…