Investment pp 66-78 | Cite as

The limitations of Jorgenson’s model

  • M. C. Baddeley


As was seen in Chapter 5, Jorgenson describes investment as a process of optimal capital stock adjustment in which the current costs and future benefits of investment activity are balanced. However, Jorgenson’s model did not escape criticism; it is based upon a number of restrictive assumptions. Some of the key criticisms of Jorgenson’s theory are discussed in this chapter, including:
  • the problems associated with aggregating a macroeconomic model of investment from the microfoundations of perfect competition;

  • the failure formally to specify the expectations formation process;

  • the related neglect of issues to do with rationality and uncertainty;

  • the absence of an explicit dynamic structure reflected in the ad hoc nature of lag specifications;

  • the absence of adjustment costs;

  • the neglect of financing issues; and

  • problems with measuring and defining capital goods in a world in which the capital stock is heterogeneous and made up of capital machinery of many different vintages.


Interest Rate Capital Stock User Cost Perfect Competition Rational Expectation Hypothesis 
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Copyright information

© M.C. Baddeley 2003

Authors and Affiliations

  • M. C. Baddeley
    • 1
  1. 1.Gonville and Caius CollegeCambridgeUK

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