Working Paper

Economic rents, the demand for capital, and financial structure

Abstract: The correspondence between the demand for capital and various measures of the return on assets, the cost of capital, and Tobin?s q often is tenuous (Abel and Blanchard 1986; Hayashi 1982), at times even perverse. Of a variety of possible explanations, this paper considers the consequences of allowing for declining returns to capital--a declining marginal efficiency of capital schedule (MEC). This modification not only relaxes the connection between the demand for capital and many of its traditional determinants, but it also may introduce a connection among the value of the firm, its financial structure, and its stock of assets.

Keywords: Capital;

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 1991

Number: 91-8