Recent research in macroeconomics has emphasized the importance of linking the financial and real sectors and the need for working with optimizing models. Tobin’s Q model of investment would appear to provide a framework that can satisfy these two criteria. In contrast to the original...

Despite their solid theoretical basis, models of business investment based on Tobin's Q theory have recorded a generally disappointing empirical performance. This paper examines one possible source of misspecification. When the firm's technology is expanded to include two or more capital inputs,...