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.
| Original language | English |
|---|---|
| Pages (from-to) | 274-315 |
| Number of pages | 42 |
| Journal | Southern Economic Journal |
| Volume | 87 |
| Issue number | 1 |
| DOIs | |
| State | Published - 1 Jul 2020 |
Keywords
- business cycles
- duopoly experiments
- experimental economics
- heuristics
- investment
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