Paula R. Worthington

Investment, cash flow, and sunk costs

This papers analysis of U.S. manufacturing industries confirms previous research showing that cash flow and investment spending are positively correlated, even after controlling for investment demand, and it makes two new points as well: firstly, that the effect of cash flow on investment is greater for durable goods industries than for nondurable goods industries and, secondly, that cash flows effect is significantly larger in industries with high sunk costs than in those with low sunk costs. The latter finding suggests that external financing of capital investment is more difficult when the assets being financed are highly specific or are sunk. Copyright 1995 by Blackwell Publishing Ltd.

Strategic investment and conjectural variations

Abstract This paper analyzes investment decisions under the alternative assumptions of competitive, collusive, open loop non-cooperative, and feedback non-cooperative behavior. Steady state capital stocks, prices, and outputs are obtained and compared. The paper shows that one of the linear feedback equilibrium decision rule coefficients is a dynamic version of a contemporaneous conjectural variation. The same decision rule coefficients are shown to imply a particular value for the contemporaneous conjecture. The implied conjecture embodies subgame perfection and approaches the competitive value as the number of firms in the industry increases.

On the Distinction between Structure and Conduct: Adjustment Costs, Concentration, and Price Behavior

The effect of concentration on the speed of price adjustment is studied and shown to be ambiguous when adjustment costs are convex. The result relies on making a distinction between the structure of an industry and the conduct of firms within it. Copyright 1989 by Blackwell Publishing Ltd.

Investment and market power

Abstract This paper argues that the degree of market power within an industry is an important determinant of interindustry differences in investment behavior A neoclassical investment model is analyzed to show that market power is positively associated with capital stock flexibility The intuition for the result is that firms adjust their stocks and investment plans quickly in response to new conditions so as to capture the rents asssociated with their market power