Companies don't invest more because of tax breaks; they do it because they're terrified their rivals are going to beat them to it.
Traditional economics suggests that cheap borrowing or tax breaks are the primary drivers of corporate growth. This study reveals that the 'network effect' of competition—investing because a direct rival did—is the dominant force shaping how capital moves through the U.S. economy.
Dynamic Investment and Product Market Rivalry: The Network Q Model
SSRN · 6408139
We present a new dynamic model of corporate investment in imperfectly-competitive product markets, extending the neoclassical (Q) theory of capital to a multi-firm, multi-product, fullystructural model. Our model embeds a state-of-the-art hedonic demand system, endogenizes firms' markups and generalizes Tobin's Q to a matrix (or network) of product market spillovers, which captures how each firm's investment affects that of its rivals. We provide existence and uniqueness results along with exact