The Wicksell-Tobin investment model |
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| Institution: | 1. Department of Computer Science & Engineering, Bharati Vidyapeeth''s College of Engineering, Delhi, India;2. Pattern Analysis & Machine Intelligence (PAMI) Research Lab, Department of Computer Science, University of South Dakota, USA;3. Jindal Global Business School, O. P. Jindal Global University, India;4. Faculty of Business and Law, University of Portsmouth, Richmond Building, Portland Street, Portsmouth, United Kingdom of Great Britain;5. School of Information Technology and Engineering, Vellore Institute of Technology, Vellore, India;6. Positive Computing Research Cluster, Universiti Teknologi PETRONAS, 32610, Bandar Seri Iskandar, Perak, Malaysia |
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| Abstract: | We formalize in this paper Wicksell's investment decision model and compare it with Tobin's q-theory. Wicksell's firms either compare the natural rate of interest with the prevailing market interest rate or the capital values with the replacement costs of investment projects. This exposition of Wicksell's approach reveals some striking similarities with Tobin's supply-price-of-capital model, which relates the marginal efficiency of capital to the rate of return required by portfolio investors in the well-known q-ratio. The ratio market value to replacement cost of capital should, therefore, more appropriately be termed the Wicksell-Tobin q. Our formalization of Wicksell's investment theory appears to open up a promising new avenue for further research in cases where banks provide the source of funds. |
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