Document Type

Article

Language

eng

Publication Date

7-2020

Publisher

Wiley

Source Publication

Southern Economic Journal

Source ISSN

0038-4038

Abstract

We report laboratory experiments investigating the cyclicality of profit‐enhancing investment in a competitive environment. In our setting, optimal investment is counter‐cyclical when investment costs fall following market downturns. However, we do not observe counter‐cyclical investment. Instead, we see much less strategic behavior than our rational investment model anticipates. Our participants exhibit what Porter (1980) terms a competitive blind spot, and heuristic investment models where individuals invest a fixed percentage of their liquidity, or a fixed percentage of anticipated market demand, better fit our data than does optimal investment. We also report a control treatment without cost changes and a treatment with asymmetric investment liquidity. Both of these extensions support our main result.

Comments

Accepted version. Southern Economic Journal, Vol. 87, No. 1 (July 2020): 274-315. DOI. © 2020 Wiley. Used with permission.

Available for download on Friday, July 01, 2022

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